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Business investment question
Posted on 10/6/14 at 4:48 pm
Posted on 10/6/14 at 4:48 pm
Simplified question .... If someone buys a 10% stake in a small business, does that automatically mean that they are inheriting 10% of the monthly profits .... and on the flip-side are they responsible for 10% of the business's losses? any basic info is appreciated.
2
Posted on 10/6/14 at 4:51 pm to JW
No, there is no guaranty the majority owners cannot vote to distribute anyway they see fit. Yes most times.
I'd need to know a lot more detail about the transaction, but the two answers above should guide you, and your attorney, to avoid these pitfalls.
I'd need to know a lot more detail about the transaction, but the two answers above should guide you, and your attorney, to avoid these pitfalls.
Posted on 10/6/14 at 4:56 pm to Iowa Golfer
gotcha ... thanks. But what if the business is operating at a loss and that 10% partner is covering the majority owner's 90% responsibility. Would you consider that an extension of the investment into the business or at least a loan to the majority partner?
Posted on 10/6/14 at 5:28 pm to JW
There should be an operating agreement that covers all of these issues. If you invested in a business with no operating agreement, you really fricked up.
Posted on 10/6/14 at 6:14 pm to tigeralum06
Doesn't matter what I consider it, it matters what would be admissible in court. It also matters if it is a partnership, s or c corp or llc.
Posted on 10/6/14 at 6:17 pm to JW
quote:
If someone buys a 10% stake in a small business, does that automatically mean that they are inheriting 10% of the monthly profits .... and on the flip-side are they responsible for 10% of the business's losses? any basic info is appreciated.
Adding on the answers above, no, profits are not automatically distributed based on ownership %.
And no, you are not responsible for any losses greater than your initial investment. That's basically the reason corporate entities exist.
quote:
gotcha ... thanks. But what if the business is operating at a loss and that 10% partner is covering the majority owner's 90% responsibility. Would you consider that an extension of the investment into the business or at least a loan to the majority partner?
If you bought 10% of the business for $XX, and then put more $ into the business, you should either receive an additional % of the business or treat it as a loan to the business to be repaid in a way not tied into your 10% ownership stake.
Posted on 10/6/14 at 9:03 pm to JW
There is really no hard and fast answer, unless it's an S corp. If it's an S Corp, then everyone is treated for everything by their stock holder percentage. If you own 10 percent of the stock of an S corp, then everything is 10 percent - you get 10 percent of the income allocation, 10 percent of the loss allocation, 10 percent of the distributions, 10 percent of the capital calls, etc.
If it's a partnership (including a LLC taxed as a partnership) you can basically structure any part of the deal any way you want. You can have one person get all the allocation of losses until their capital account hits zero. You can have unequal distributions. Guaranteed payments. Etc.
C corps are in the middle.
If it's a partnership (including a LLC taxed as a partnership) you can basically structure any part of the deal any way you want. You can have one person get all the allocation of losses until their capital account hits zero. You can have unequal distributions. Guaranteed payments. Etc.
C corps are in the middle.
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