How to Finance an LLC

By Salvatore Jackson

A limited liability company, or LLC, is a form of business association popular with persons looking to start a business. One of the major reasons for the popularity of the LLC among entrepreneurs is flexibility. The owners of an LLC, who are called members, are free to determine the structure of the LLC. However, a significant disadvantage is that an LLC cannot issue stock. The inability to sell stock makes attracting financing in an LLC a slightly more difficult process than attracting financing in a corporation. However, by drafting an operating agreement, it is still possible to attract outside financing for an LLC.

A limited liability company, or LLC, is a form of business association popular with persons looking to start a business. One of the major reasons for the popularity of the LLC among entrepreneurs is flexibility. The owners of an LLC, who are called members, are free to determine the structure of the LLC. However, a significant disadvantage is that an LLC cannot issue stock. The inability to sell stock makes attracting financing in an LLC a slightly more difficult process than attracting financing in a corporation. However, by drafting an operating agreement, it is still possible to attract outside financing for an LLC.

Step 1

Create a business plan for your LLC. A business plan is a summary of the goals of a business and the means by which the owners of a business intend to achieve those goals. Most prudent individuals will not invest in a business if it does not have a sound business plan. A sound business plan will typically set forth the type of business an LLC plans on conducting and include information that shows that a market exists for the type of business an LLC will conduct. A business plan will set forth how the LLC will be organized and managed, as well as a detailed estimate of how quickly the LLC anticipates to grow and expand. The small business association in your state may be of assistance in drafting a sound business plan.

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Step 2

Attract investment to your LLC. If your business plan is sound, your local bank may offer to issue you a loan, particularly if you are able to supply collateral, such as real estate or an automobile, to secure the loan. Your state's small business association may also provide resources for meeting with potential investors. If your proposed business plan involves operating a nonprofit LLC, you may be able to apply for government and charitable grants.

Step 3

File an articles of organization. An articles of organization is the document that creates an LLC. It is filed with the state agency responsible for registering business entities. While filing fees vary among the states, the cost for filing an articles of organization can range between $50 and $350, as of 2010.

Step 4

Draft an operating agreement. An operating agreement is a contract that governs how an LLC will be operated. While operating agreements are typically comprehensive, there are specific issues that must be addressed in detail if your LLC will be attracting outside financing. If you have attracted an outside investor, the investor will typically own a percentage of the LLC but not exert authority over the day-to-day management of the LLC. Your operating agreement may also contain provisions that would allow the outside investors to purchase more of the LLC or sell their ownership stake.

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References

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