How Are LLCs Allowed to Raise Money?

A limited liability company has the same two general sources of capital as does a large corporation: equity and debt. The specific funding resources you can tap into are different for a small company LLC compared to a publicly traded corporation. Your biggest challenge as the primary owner of a LLC is to convince the sources of capital that your business will be a good investment.

Raising capital for your LLC through the equity route means selling ownership stakes in your business. While the official term for LLC owners is members, for your LLC small business you can think of raising equity capital as either bringing on partners with cash to contribute, or having investors in your business. Selling part of your LLC to raise money requires you to develop a business plan and a presentation covering why buying into your business would be a good investment.

One advantage of the LLC business type is the flexibility to structure the ownership rights of new members in any way that meets the needs of your business. When you add a member who will invest in your LLC, you can specify in the LLC operating agreement how much or little say the new member will have in the management of the business. The new member's share of the profits can also be specified and set up differently than for other members, such as yourself as the primary owner of the LLC.

The alternative to selling part of your business to raise money is to borrow the money you need. Debt financing commits your business to paying back the borrowed money plus whatever rate of interest the lender charges. Getting a loan can be tough for a small business, especially if your LLC does not have a long track record. It may even require the owners to give up some of the liability protection the LLC provides, and personally guarantee repayment on the loan, especially for a first loan through a lender. The successful repayment of an initial loan by your LLC will make it easier to borrow in the future, without the requirement to put your personal credit on the line.

Read More: Can an LLC Borrow Money From Individuals?

Consider private sources of loans as well as going to a bank to borrow money for your LLC. If you already have investor-members, these same individuals may be willing and able to lend money to the company to help it grow. Other people you know, including friends and relatives, may lend money for an attractive rate of interest. Private loans will require much less in the way of paperwork compared to going to a bank. If you do want to get a bank loan, the Small Business Administration provides a government guarantee for lenders who provide small-business loans. Such a guaranteed loan will be handled by a local lender, following the guidelines set by the agency.