Can I become an investor/member of an LLC with no recourse?

Question

I have been talking to a guy who is looking for equity investors to start a business.  He plans on structuring the company as an LLC with each investor owning a % based on their contribution.  I am interested, but I dont want to be liable for losses that exceed my initial investment such as leases and loans.  Is this possible?

Jarrod M. · Answer

I'm new to the boards, but I have to say that Bill Gulley consistently gives sound advice.  To answer Larry's question, yes it can be done, if done correctly.  Bill nicely lays out all the angles that will need to come together, and an experienced attorney should guide you through each of those angles to protect your interests.

You'll typically give up control rights in the LLC if you are looking for the type of liability shield you describe.  Pay particularly close attention to what your control rights are (if any), what situations you are required to contribute capital to the LLC, and what indemnities are you getting from the manager/managing member.  There may also be situations where you want the ability (i.e. your choice) to contribute more capital if the LLC needs it.  Watch for situations where other members could elect to contribute more, which could dilute your interests if you chose not to contribute.  Obviously lots of moving parts, so certainly grab a good attorney to help you out.

Bill Gulley · Answer

Paul, not necessarily, officers and director or members are liable for their acts amongst each other and to the public should they not take reasonable care or commit illegal acts.

Might be hard for a start up business to obtain performance bonds and obtain errors and omissions coverage along with a ton of liability coverage, ask your agent.

Another safeguard might be a Hold Harmless and Indemnification Agreement made by and between the members, that can help keep you out of court in some cases, the indemnification is only as sound as the financial strength backing it up and there must be consideration for the Agreement, consideration may be viewed in light of the loss suffered as well as the conduct of those entitled to being made whole. Good eye wash sometimes.

In an LLC it's generally the managing member who takes the hit, not passive members as they have recourse against the manager. Different types of business concerns carry different exposures of liability. A company that is undercapitalized may have issues as well.

Best to see your attorney as to your exposure and steps to limit your personal liability, not only publicly but amongst the other members as well. :)

Bill Gulley · Answer

@Paul Z.

True, it's always about risk and reward. The OpA generally won't be the issue, other than making poor elections, but piercing the vial stems more often from under capitalization, comingling funds, improperly executed documents or poor management in maintenance of the LLC, these issues are a reflection on the managing member. Members or limited partners should never just sit back and fail in doing their due diligence and allow a manager to have "free reign" without checks and balances.  Doesn't mean direct management of the manager, you do need to keep your distance and not become "active" in the management, but to set policy and stay on top of the books.

Speaking of your due diligence, Jarrod makes an excellent point concerning additional contributions by members that can dilute your interest, this should be addressed in the OpA and may be limited requiring consent of other members, or to equal contributions.

BTW, I have done LLCs with different classes of members, voting and non-voting, non-voting having limitations to capital, works well in Missouri (I suppose anywhere unless specifically prohibited, @Jarrod M.  may have input). It allows contractors to be admitted, partner with a property owner or financing partner, they may only be in for the duration of a project or as needed.

Yes Roy, for small investors in an LLC institutional lenders will require a personal guarantee. Exceptions exist in tax credit developments, if tax qualified funds are used or not allowed by law. The other exception might be if the borrower has liquid assets pledged as well showing they don't really need the loan! :)

Paul Z. · Answer

@Bill G.  essentially what you and @Jarrod M. stated is exactly what I was implying. Is it full proof to hold yourself completely harmless of any and all business dealings? Absolutely not. Which is why it comes down to the very foundation of it all that being who your advisors are and whether or not the Ops Agreement could be held up in a court.

Roy Guevara · Answer

hi there, I know lenders lenders require a person to be responsible for debt if you are going to take out loans. good luck

Larry Flanagan · Answer

What I am primarily concerned about is a $100,000/yr commercial lease and a $500,000 bank note.

Paul Z. · Answer

Speak to an attorney with "experience" in working with venture capital, partnerships, LLC, Corporations, PPMs etc. etc. Is it possible? Yes as long as the operating agreement and any and all contracts are written within the full extent of the law. But again do your own due-diligence and pick the "right" professionals to advise you before you make any decisions.

Can I become an investor/member of an LLC with no recourse?

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