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Old 17th October 2013, 10:05 AM   #1
newb2LLC
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Join Date: Oct 2013
Posts: 1
Default How To Raise Money In An LLC

Hello all,

I am getting ready to launch a website and am planning on setting it up as an LLC. I am doing this to avoid being sued. I plan on creating a manager-managed LLC, so that I can remain in complete control of the business. I plan to make small investors passive members of the LLC, their contributions will pay for website hosting. They will be able to provide me with funds without telling me how to run my business. Lets say it is myself and 9 passive members that make up my LLC. Even though I pay for the basic start-up fees (business license, copyright, trademark, etc) amounting to $1,000, the rest of the money for the first year of operation comes from my passive members. They each contribute $1,000.

How is this structured financially? Because I only contributed 10% of the total investments, does this mean I am only entitled to 10% of the profits? Or do I specify the share of profits each investment of passive members is worth? So for example, each passive member's $1,000 investment is worth 5%.

Also, because it is a website what if I do not make any money in the first year?

I realize this may not be worded perfectly, but I did my best. Any suggestions/help would be great. I will eventually consult with a lawyer, but would like to understand the basics first. Thanks ahead of time.

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Old 23rd October 2013, 06:50 AM   #2
ArcSine
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Join Date: May 2009
Location: Charlotte, NC
Posts: 45
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Welcome, New, and congrats on the new venture. I hope it rolls on to become a lucrative and rewarding operation for you.

Quote:
Originally Posted by newb2LLC View Post
..planning on setting it up as an LLC. I am doing this to avoid being sued.
Note that having your biz wrapped inside an LLC won't prevent a suit, what it does is to reduce the likelihood that your personal (i.e., non-business) assets would be at risk in the event of an unfavorable suit outcome. Just be sure to respect and follow all LLC formalities in the conduct of your business; your attorney will fill in those details.


Quote:
Originally Posted by newb2LLC View Post
Because I only contributed 10% of the total investments, does this mean I am only entitled to 10% of the profits? Or do I specify the share of profits each investment of passive members is worth? So for example, each passive member's $1,000 investment is worth 5%.
It's the latter. Generally speaking the profits are shared based on the total contributions of all the partners, cash and otherwise. You might be chipping in for 10% of the cash, but you're also in for 100% of the time, energy, and know-how for generating the profits. It'll come down to negotiations: they'll get out their checkbooks only if they're offered a % which they feel gives them an adequate return on their investment (which in turn, depends on two things: (1) what kind of profits / cash flows they think you might be able to produce; and (2) how risky or uncertain they perceive the venture--and those profit forecasts--to be).

On the other hand, the percentage of the profits you retain in the deal must be sufficient to make this whole thing worthwhile to you as well. Hence, how much % you take and how much they get will be a matter of negotiation, and if that sweet spot can be found whereby both sides are happy, then a deal gets done.

Quote:
Originally Posted by newb2LLC View Post
Also, because it is a website what if I do not make any money in the first year?
That's an advantage of having your investors come in as passive equity rather than as lenders. They receive a return on their investment when an as your business generates the profits. If they were instead loaning you the cash, they'd expect timely payments of principal and interest, regardless of how much cash the company has in the ol' cigar box.

Quote:
Originally Posted by newb2LLC View Post
I realize this may not be worded perfectly, but I did my best. Any suggestions/help would be great. I will eventually consult with a lawyer, but would like to understand the basics first. Thanks ahead of time.
You did fine, and kudos on wanting to do your homework. Always a good thing. Best of success!

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