How should we structure a private investment group looking to move into other investments beyond the capital markets?
I have started a small general partnership with 13 members investing in the U.S. securities market. Going forward, members of the group would like to expand some of the group's funds into outside investments, such as purchasing small existing businesses or franchises.First things first. Consult with an attorney and an accountant experienced in the creation and representation of private investment funds. Do that to get familiar with the issues you'll be facing--even before you start talking to consultants.
We would like to move the partnership either to an LLP, LLC or corporation. We will be talking to business consultants when we reach this point, but I would like to have an idea of how to structure this so I know what to expect.
The goal would be to have each of the members in charge of a subsidary relating to the initial holding group. Is this possible, and how can it be structured to the avantage of everyone in the group?
As with the formation and running of other kinds of businesses, you have a number of considerations gong on here: the need for limited liability protection (which your current general partnership status does not provide), tax issues (the treatment of which vary depending on the entity you choose), financial issues (the costs of perhaps forming separate companies for each subsidiary), and other interdisciplinary legal issues that may touch on U.S. and international taxation, banking regulations, the Investment Company Act and other securities laws.
In addition, you will have management issues that must be dealt with in some form of entity ownership agreement (among other investor-related documents). For example, what if Subsidiary #1 doesn’t perform as well as Subsidiary #2? Are all of the members willing to take the loss? Are you adequately disclosing these risks to new potential investors?
Make sure to get advice that’s tailored to your situation--this is definitely an area where you do NOT want to rely on what you find on the internet alone.
Nina L. Kaufman, Esq. is an award-winning New York City attorney, edutainer and author. Under her Ask The Business Lawyer brand, she reaches thousands of entrepreneurs and small business owners with her legal services, professional speaking, information products, and LexAppeal weekly ezine. She also writes the Making It Legal blog.