Outside Funding for an LLC

[Nicholas Sheridan, Jr.]

I am running into a financing issue that I can't find the answer to anywhere I search. I am looking at financing options for the next property and what I wanted to do is setup an LLC, have investors (friends and family) put money into the LLC and then I would use that money as the downpayment. I would pay the investors back with a fixed rate loan and I would retain 100% ownership of the LLC. HOWEVER, I just found out that this is most likely illegal especially if the investors are non-accredited. Damn! Now I am wondering if the investors could be managers in the LLC, have 0% equity and loan the LLC money?

[Guifre Mora]

Originally posted by @Nicholas Sheridan, Jr.:

I am running into a financing issue that I can't find the answer to anywhere I search. I am looking at financing options for the next property and what I wanted to do is setup an LLC, have investors (friends and family) put money into the LLC and then I would use that money as the downpayment. I would pay the investors back with a fixed rate loan and I would retain 100% ownership of the LLC. HOWEVER, I just found out that this is most likely illegal especially if the investors are non-accredited. Damn! Now I am wondering if the investors could be managers in the LLC, have 0% equity and loan the LLC money?

 Nicholas, I'm not giving legal advice please do your due diligence. 

An LLC has the same access to exemptions from registration that a corporation has. So, as long as it provides the required disclosure and meets the other requirements of the exemption, it can sell securities. Just make sure you should speak to an experienced securities attorney before you do sell membership interests and not do that on your own because the failure to meet the requirements of the exemption can be severe.

Note that there is a difference between offering shares (or units) or investors once a company is up and running, and pooling investors together to found an organization.

Non-accredited investors can together form a partnership or LLP or LLC. However, that entity is then only considered an accredited investor if either ALL of the investors are accredited or if the total capital in the partnership exceeds $5 million.

Most small LLCs with outside investors can obtain a securities law exemption. You can speak with an attorney to learn more about security laws.