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LLC Funding Risks
Limited Liability Companies (LLCs) have become very popular because they are more flexible than old-school C or S corporations, and LLCs offer more tax advantages for the owners.
Corporate entities offer their owners and shareholders very good liability protection from the entity's actions.
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 to 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 member'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. Remember, corporate entities can vanish overnight, and LLCs are usually hard to recover from, if you have to sue them.
Many Secretary Of State (SOS) office no longer offer counter service any more. They have a drop off box, and you can pay them (e.g.) $5 to fax the information to you. Make sure to include your fax number in the requestor information area. Often you can request a statement of information over the counter for viewing purposes only. They do allow individuals to take a picture of the statement of information or any other documents regardless of whether or not certified documents are ordered. Also available for viewing are the articles of incorporation on both microfiche or paper. The SOS will not let you take sample copies with you. They require that you order certified or non-certified copies and wait the 5-7 days or longer it takes to pick them up or mail them out.
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