Funding an LLC – Three Things to Consider When Looking to Fund an LLC
I am not a lawyer, I am a Judgment Broker. This article is my opinion, and not legal advice, based on my experience in California, and laws vary in each state. If you ever need any legal advice or a strategy to use, please contact a lawyer.
LLCs have become very popular because they are more flexible than old school C or S corporations, and American Samoa LLC offer more tax advantages for the owners.
Corporate entities offer their owners and shareholders very good liability protection.
LLCs may offer their owners better liability protection than C or S corporations do. That extra liability protection is the reason one should be careful when lending or investing money with a LLC.
When a LLC succeeds and makes money, life is good, and they will most likely pay you what they agreed to.
When the economy is bad, or the LLC is not making money, or if owners and/or management is not honest, then you might have to sue the LLC to try to recover what the LLC owes you.
Suing a corporation is usually tough because the owners and shareholder are rarely liable for the actions of the corporation.
Suing a LLC is usually tougher, because in many states, a charging order (in California, CCP 708.310) is the only way to attempt to reach a (judgment debtor) LLC’s assets.
Because of the potential extra risks in funding a LLC, there are three things you should consider, before lending or investing money in one:
1) Get personal guarantees from the owners of the LLC, especially when the LLC entity is small or new.
With signed and notarized personal guarantees in place, the owners will have an incentive to be extra careful to manage your money correctly. If things go badly, it is much easier to recover a judgment against an individual, than a LLC.
2) Get UCC liens on every asset the LLC owns, including computers, accounts receivable, etc. UCC liens are available through a Secretary Of State.
To be most effective, UCC liens should identify specific assets. UCC liens may not get you paid, however they increase your odds.
3) Verify the LLC’s status at a Secretary Of State’s web site, and make sure the status is ACTIVE, which means they paid their taxes and are registered with the State.
Check that the LLC has a business license in the city they are based in, a current fictitious name (DBA) filing active in the county they are based in, and you know what bank account they use.
Of course, when the LLC has been running for years, and has plenty of income, and you know the owners, you can feel more comfortable lending or investing.