Legal Question in Business Law in California

Re: Forming an Investment Club (Partnership-LLC)

this site should answer all your questions:

http://www.better-investing.org/

Re: Forming an Investment Club (Partnership-LLC)

What you're proposing to do is loaded with possibilities for future disputes and litigation, and I don't know of any totally safe way to do it.

If you are determined to proceed, I definitely think it's necessary to have an attorney at least review your documentation, if not prepare it in the first place. In addition to the LLC or partnership and real-estate laws, what you're proposing implicates state and federal securities laws and has important tax aspects.

At the rate you'll be accumulating funds, it is obvious some borrowing or assumption of debt will become necessary. In order to do that, someone with a credit rating will have to step forward. Who will that be? All the members? If only one or a few, how are they compensated for the extra risk? The LLC itself is unlikely to be credit worthy for many years, if ever.

You could theoretically use either a partnership or an LLC for this venture. In a general partnership all the partners would be liable, but for that reason it might be able to borrow. An LLC would be the preferred vehicle if it is able somehow to obtain financing, since its members would not be individually liable (assuming the LLC is formed and managed properly and there is no fraud on the part of the members). If there is fraud and/or mismanagement, the LLC and the responsible individual would be the most vulnerable to suit, but even innocent bystanders might be sued and have to present defenses.

An LLC must have a name, and the name must reflect that it is an LLC.

An LLC is, unlike a partnership, a 'creature of statute' and will not be recognized unless and until it has filed the proper form with the Secretary of State. It is a simple one-page form but it has to be absolutely correctly filled out and executed.

Banking matters will depend on the form of business organization adopted and the bank's requirements. Generally both LLCs and partnerships open and maintain banking relationships in the name of the business rather than that of any individual participant or group of participants. Segregation of business and personal funds is essential.

Both partnerships and LLCs are able to purchase and own property in their own names as a matter of law, but the legal capacity to buy property does not necessarily imply the real-world ability to qualify for the necessary financing.

All in all, you will need lots of legal assistance if you're going to do this properly.

Re: Forming an Investment Club (Partnership-LLC)

I usually try not to say "consult an attorney" because that defeats the point of this service but I think that in this case you should consult one because of all the potential pitfalls.

Re: Forming an Investment Club (Partnership-LLC)

Generally speaking, you are safer with a general partnership in this context because general partnership interests are generally not securities while LLC interests would be, especially of not all members are participating in management. Moreover, if you use and LLC, somebody is going to have to personally guaranty accounts, debt instruments, etc., anyway so there is little benefit to an LLC in this context. Besides, forming a general partnership is easy and free so long as everyone shares in profits, losses, gains and distributions in proportions equal to their investments. IF YOU ARE GOING TO RECEIVE A MANAGMENT FEE FOR YOUR EFFORTS MANAGING, THEN YOU NEED TO MAKE MANY DISCLOSURES TO PROTECT YOURSELF. If you would like more information, call or email me at the address or phone on our firm's website.

www.beauchampfirm.com

Bob

Re: Forming an Investment Club (Partnership-LLC)

The LLC should work for what you're proposing, to own the property, manage it, and protect against lawsuits.