If I have a family member whose willing to invest in my home-based e-business; by securing a line of credit at her bank, legally speaking, what would her role or relationship in my business be since my biz structure will be set up as an LLC sole-proprietorship? Also, can a home-based e-business even be set up as a LLC sole-proprietorship? Thanks
Brian M. Martin, CEO HRxpress Agency "Empowered to succeed"
#1. "RE: Line of Credit for Startup Financing" In response to Reply # 0
You appear to be confused on business structure terms. A sole proprietorship is just that, a sole proprietorship. Effectively, Brian and the business are one and the same. A LLC is a Limited Liability Company and is made of of Members anywhere from 1 to whatever your particular state allows. In this case, Brian is Brian, and the business is the Business, and effectively, Brian works for XXXXBusiness.
Is the family member you're speaking of going to be an actual investor, where she's getting a share of the business for providing the line of credit? Or, is she just loaning you the money in effect and you pay her/it(the bank) back?
An investor generally gets a share of the business (the investment) and expects to make a return through a share of the future profit distributions and increased value of the business. A lender on the other hand, loans money and gets their return through interest.
She can be either an active Member, or a passive Member of the business. With my two partners, one is active and one's passive. Two of us receive a regular salary plus our share of the distributed profits, the passive investor just receives her share of the profit distributions.
If she already has a job and is simply going to be a passive investor you'll have to be careful how you handle things so as not to create family problems. Let's assume she gets 25% of the business for providing the startup capital and won't be working in the business. You'll get a salary because you work in it every day, she won't. When the period ends and you distribute profits you'll get a check for 75% of them, and she'll get one for 25%. That isn't usually where the problems come in. Say the company ends up doing well and you want to raise your salary waaaay up beyond what a similar position anywhere else would be paying. Now you're screwing her because your outragous salary is drawing down the available profits for distribution. Same thing when it comes to company cars.
We elected not to go the company car route but had we...to be fair, we would've provided one to our passive partner too. Otherwise, we'd be diminishing her share of the profits. It's usually these areas that cause problems in partnerships. There's no room in partnerships for inflated egos.
You can have any business structure you want in your home. Sole Proprietorship, LLC, S-Corp, C-Corp. None are determined by the building they reside in.
#3. "RE: Line of Credit for Startup Financing" In response to Reply # 2
Thanks Sylvia, just trying to make it clear for him and others...there always is a lot of confusion in this area. I wish there was a way one could just write this stuff once...it seems like I end up answering the same questions over and over again. Take care and thanks again