Investors and others * Part 1

Adding Investors and others to your Entity – Part 1

by Bukre Ayan

The eighth in a series of articles for Entrepreneurs

Your business is growing, and everything is going so well. So far you run your business as a sole owner of an LLC or a corporation. At the next step, other people offered to join you as a co-owner who can work with you on the daily operations, or you consider having a co-owner and/or attracting new investors. What are the key factors you should keep in mind when adding an investor or co-owner to your entity? Here, we will discuss that.

Why Are You Adding?
Adding a co-owner may be helpful in many ways. A new co-owner may bring special skills (e.g., marketing, or technical) to your business, or may help you to increase your productivity. Eventually, you will have someone to share your responsibilities, and discuss ideas that would strengthen your company. But, if your sole purpose is to raise money, instead of having a co-owner, you should consider i) attracting investors who have no intention to involve in managing daily operations, or ii) getting a loan. Even though adding a co-owner may provide some capital to help you achieve some of your goals like hiring new employees, or expanding your facilities, a new co-owner will be the second voice in the decision-making process. You may eventually end up changing the way you operate your business to get along with your co-owner. Also, a co-owner will diminish your percentage in the profit.

Choosing the Right Co-Owner
People are always nice and passionate about the future of the business during negotiations. However, you should not let this step trick you into a co-ownership that ends up closing your business because of the conflicts between the co-owners. You should be careful when deciding whether someone is a good fit for you and your business as a co-owner. You should ask yourself questions about the potential co-owner like; Do you know him/her well? Do you trust his/her abilities? Can you work with him/her well without having difficulty communicating with him/her? Do you think your working styles match? After you answer these questions, if you have any concerns, you should communicate these with your potential co-owner.

Compliance Before Investment
As explained repeatedly in our previous articles, when operating your business as a corporation or an LLC you should comply with the requirements of the law, such as holding annual meetings and special meetings, when necessary. We explained why it’s important to protect your personal assets. Additionally, it’s important when you try to attract new investors. They would like to see the records of the company before they invest. Nobody would like to invest in an entity that skipped holding its annual meetings, didn’t hold special meetings when there is a major business decision or fell years behind its biennial filings. Otherwise, it would mean risking the investor’s or co-owner’s personal assets as courts may hold them personally liable for the debts or liabilities of the business. If you don’t want to miss any good investment opportunities in the future, you should comply with the legal requirements while you operate your business.

(Our next article in the December edition will be on Adding Investors and Others to Your Entity- Part 2 where the process of adding investors and others will be discussed. To see the previous articles, please visit our website at https://www.reedbusinesslaw.com)

Please be advised that this article is not intended to provide you with any legal advice, and prior results do not guarantee a similar outcome.

Photo of a man in brown leather jacket by RODNAE and photo of a manstanding near the projector screen by Diva Plavalaguna.

I am an international associate with the firm of Reed CNY Business Law, admitted to practice law in New York and Turkey, specializing in business, immigration, and real estate law. Spanish translations of this series are provided by Ms. Sylvia Espinosa, our firm’s legal intern from Mexico. Reed CNY Business Law represents individuals and businesses throughout Central New York and around the world. Contact us at bayan@reedbusinesslaw.com or sespinosa@ReedBusinessLaw.com.