Corporations and seed money for start up limited partnership.

Asked about 4 years ago - Walnut Creek, CA

Im planning on setting up a corporation for my new company. llc will not work due to collection activity and recent foreclosure and judgments. Will a s corp protect me more than an llc from creditors. I was told that with an ein number as opposed to an llc using ss number i will be protected.
Also im receiving 25k of seed money from a private investor. I will only need the money for 5-12 months. How do i structure limited partnerships. Can i arrange a percentage of return on his money? I know if he gives me 25k he will want at least 10k return on his investment for the risk and specific time frame. Please advise the best strategy moving forward.

Attorney answers (4)

  1. Bryant Keith Martin

    Contributor Level 18

    1

    Lawyer agrees

    Answered . Regardless of “collection activity,” LLC’s provide a bit better protection than corps, because a shareholder of a corp may be found liable by a “piercing of the corporate veil” due to failure to comply with corporate procedures, when combined with unjust enrichment of the shareholder. Thus far, I am not aware of any such attack on LLC’s, though it could happen. Protection has nothing to do with the EIN, which is just a way that the IRS keeps track of the entity. An LLC using an SSN is just a single member LLC. The IRS ignores same for tax purposes but that has nothing to do with the shield for liability. Limited partnerships are not used in small deals because they have complex tax rules and docs and still require that someone have unlimited liability.How do you know what return you can give till you know what the business will earn. As to the potential structure, this question calls for a lengthy answer far beyond the scope of these brief discussions. Consult with a good business lawyer about that.
    DISCLAIMER—This answer is for informational purposes only under the AVVO system, its terms and conditions. It discusses general legal principles, trends, and considerations and is not intended as specific legal advice regarding your question. Each state has different laws and the answer could be different if all the facts were known. Full evaluation of your legal situation would require personal consultation permitting an understanding of all the facts and circumstances. This answer does not establish an attorney client relationship.
    (Bryant) Keith Martin
    sbbizlaw.com

  2. Dana Howard Shultz

    Contributor Level 20

    1

    Lawyer agrees

    Answered . I agree in part and disagree in part with the first answer.

    I see no inherent difference in the level of protection between a corporation and an LLC. While "alter ego" problems (please see the post at the link below) typically are discussed relative to a corporation, I fully expect that comparable facts in an LLC situation would produce a comparable result.

    I agree that you need to retain a business lawyer to help you with the investment issue. The investment might take the form of equity (common or preferred), debt, convertible debt, etc. A careful analysis of business considerations and all other facts will be required to help you achieve a proper result.

    Disclaimer: This post does not constitute legal advice and does not establish an attorney-client relationship.

  3. Bryant Keith Martin

    Contributor Level 18

    1

    Lawyer agrees

    Answered . With regard to the above comments on my answer to the Q on piercing, plz read my answer a little more carefully. I said an "LLC provides a bit better protection that a corp" because of piercing "due to failure to comply with corporate procedures." Mr. Schultz’s blog lists lack of "adequate corporate records and minutes" as one factor courts consider.
    While this sometimes seems like a makeweight for a court about to pierce a corp, the fact remains that LLC's have no requirements for minutes to comply with. This must reduce their potential for piercing to at least a small extent. A couple of years ago I had a case on piercing LLC's. Extensiver nationwide research at that time revealed no case where a court pierced an LLC. LLC's are still young. As time passes such a case may appear, but I still will advise my clients that the risk is less for an LLC than for a corp for piercing.. Best practice of course is to capitalize well, have insurance and maintain separate books for the entity, whether a corp or an LLC.
    DISCLAIMER—This answer is for informational purposes only under the AVVO system, its terms and conditions. It discusses general legal principles, trends, and considerations and is not intended as specific legal advice regarding your question. Each state has different laws and the answer could be different if all the facts were known. Full evaluation of your legal situation would require personal consultation permitting an understanding of all the facts and circumstances. This answer does not establish an attorney client relationship.
    (Bryant) Keith Martin
    sbbizlaw.com

  4. Mitchell Paul Goldstein

    Contributor Level 20

    1

    Lawyer agrees

    Answered . The level of protection is the same. You have more formal requirements for a corporation than an LLC, but piercing the veil exists for both. Many investors will not invest in an LLC, but they will in a corporation so you may want to talk to a business attorney with knowledge of start-ups and seed capital investing. Each type of entity has tax consequences that you need to address. LLCs, C-corps and S-corps are treated somewhat differently and a business attorney who can handle tax issues can advise you about that.

    Be aware that your interest in any entity is still subject to attachment by creditors, just not the entity itself.

    [This communication is intended as general information and not specific legal advice, and this communication does not create an attorney-client relationship.]

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