Legal Question in Investment Law in California

Re: Investment in a family owned business

If it is not too late to throw another set of ideas into the hopper for consideration, let me make a few suggestions.

First, becoming a co-owner of a business and being a financial participant are two overlapping but separate concepts. You can provide financing without ownership, and vice-versa. Both providing money and becoming a co-owner carry their own set of responsibilities and potential headaches.

OK, as to becoming a co-owner: I would advise against participating in a family business as a partner. Partnerships, including limited partnerships, still have a role, but in most cases the limited personal liability available to the owners weight heavily in favor of using a corporation or limited liability company as the vehicle for structuring and operating the business.

In most, but not all, cases, a family corporation should elect to be taxed as a so-called "S corporation."

The choice between a corporation and an LLC is rather technical; in most cases, either will work, but your attorney (working with your accountant) should assist you in that decision.

Forming either a corporation or an LLC is done by making certain filings with the California Secretary of State. There is some expense for attorney fees, filing fees, and franchise taxes, but usually these are not a major problem as compared with the possible consequences of running a business (especially one with past financial problems) without limiting owner liability.

Next, the method of introducing money into the business will fall into one or the other (or both) of two categories: (1) loans, and/or (2) equity investment. The difference is that loans are supposed to be repaid, while equity investment makes you a shareholder, member or partner, and you don't get repaid as a matter of contract but you participate in profits, if any, through dividends, splitting the proceeds of selling out to a bigger company, and so on.

Documenting investments of either type can be a major project for the lawyer involved, especially if the amount is significant. There are usually security agreements, personal guarantees, financing statements, notes, etc. if it is a loan. In the case of an equity investment, different but equally (or more) careful documentation is necessary.

Whenever two people co-manage a business, there must be a written agreement between them covering rights and responsibilities, including means for breaking a deadlock if each is a co-equal, and means for protecting the minority owner from abuses if the split of power is other than 50-50.

Hope this helps.

Re: Investment in a family owned business

Structuring an investment in a business can be fairly simple if you know what you are doing, but can have terrible results if you don't. You need to consider tax implications of your proposed investment, you have to make the proper securities filings with the state, and you need to consider control mechanisms that properly reflect your goals. I have several clients that I represent in San Jose and am happy to assist you in this. Please feel free to call me at 310 442 3577. Amir Ohebsion

Re: Investment in a family owned business

You probably want to set up a partnership so that you are a general partner and your sister is a limited partner. Alternatively, the partnership agreement itself could specify rights and responsibilities.

It is easy to subsequently convert a partnership into a corporation.

We are in Walnut Creek, north of San Jose. Please feel free to contact us if we can be of assistance.