LLC selling shares like it's a corp

[DTS]

This text is copied from another thread. Title was not correct, as the original thread was posted before I could change the title.

I am so irritated with a client of mine. Maybe, it's me, but I don't think so. Hang in while I try and make some sense of this mess, if possible.

LLC filing as a partnership has 8 general partners and 7 limited partners. I've had emails and calls out all week about getting me the correct figures for the capital accts. No calls back, no emails answered, etc. Getting a very weird vibe.

Tonight I get a call telling me that they have some new "shareholders" and the capital accts that they have been actively "marketing for to build up capital" are now totaling close to $12M. At the end of last year, they were $250K. Obviously, the partner allocations that totalled 100%, now they total about 50 times that.

It appears they've treated this LLC like a corp when they aren't one. I think they are selling shares or equity stakes, if that is the right terminology? Can they do this.

I guess my question is can this company bring in add'l "people" without other members giving up something, which they have not?

I'm sure this post is not making too much sense, as my thoughts are all over the place, but if someone can make read throught this and has heard of this before, please tell me. My gut is telling me no way.

D

[Nashville]

Charter

Hi Dennis -

I believe the LLC can do all of those things, depending upon what their charter does or does not allow. The securities laws in your state may address this as well, if this LLC falls under their jurisdiction.

You're right about this being something normally transacted by a corporation. But I'm not aware of any restriction if their charter is not limited.

Most of us were taught in school about the pre-emptive first right of refusal of a shareholder when it comes to issuing new shares. In most states, this pre-emptive right has turned into a joke because the huge corporations want to swallow the smaller fish and not have minority shareholders.

[JohnH]

Dennis: I'll repeat what I suggested on the other thread. You may want to consider the possibility that they might be running afoul of state or Fed securities regulations and registration requirements if they are trying to bring in lots of outside investors. Not suggesting that's what's going on for sure, but this could be turning into a tangled mess.

[DTS]

Nashville and John

Can either of you tell me what my next step should be? I smell fish and I don't like it one bit. My instincts are telling me to get away from this asap.

On one hand, if this is permissible, I'll understand the facts and go with it. On the other, I told the member last night I thought there might be a big legal problem and that I was way in over my head on this one.

I respect both of your ideas and opinions, so send some more!

D

[JohnH]

Dennis:
When find I'm in over my head, the first thing I try to do is get out of the water.

You are the closest one to the situation, and your instincts are probably right on target. Based on what you've already stated, plus your attitude about this, I think you should get away from it as gracefully as possible. (If graceful won't work, then as awkwardly as possible).

[geekgirldany]

I agree that is alot of capital to build up so quickly. If it was me it would be over my head. Suggest they find an accountant that deals with larger companies. I've had to do that a couple of times.

[Nashville]

Have an Understanding

Dennis, you might be advised to steer your ship away from this, and that might be good advice.

If there are securities violations lurking, I would have the understanding (in writing if need be) that your liability is limited to tax issues if you are to continue.

Personally, I would not let the security regulations stop me from moving ahead with tax preparation so long as all the parties appear to be above board. However, on this kind of issue, it would be necessary to have some expertise in public accounting as well as for taxes. You're dealing with stock, resolutions, and treasury issues.

[ChEAr$]

LLC's

maybe you've seen me post before on the difference between LLC's, partnerships and
corporations.

Any LLC must act like one according to state law, regardless of the federal tax considerations and treatment. For an LLC to have more "MEMBERS" it must conform to
state law and amend the operating agreement legally.

Advice? Run; don't walk, away. Far............. away.

[DTS]

One thought

I really hate to quit on something, but I kind of made up my mind last night about doing just that. I feel the need to get away from this mess is best.

I wish I did not have to do this, as this is my very best money client, but sounds like it is about to become a real nightmare for me.

Thanks all for jumping in. Thank goodness for all of you and this board.

D

[Lion]

Put him on extension

Tell him you'll put the LLC on extension to give him time to find a good CPA experienced in his growing business, that regulatory issues might require outside audits, so he may as well move to a large CPA firm now. That also gives you time to catch your breath and find out what's really going on, sit down with him after the crush of tax season to look over his books, etc. You might decide to keep him. But, it's too hard to make an informed decision during this stressful time.

[BHoffman]

Agree with Lion. Extend if you can to give yourself some time to fully research this after 04/15. They should not have surprised you with this. That is a lot of money.

[DTS]

Tell him you'll put the LLC on extension to give him time to find a good CPA experienced in his growing business, that regulatory issues might require outside audits, so he may as well move to a large CPA firm now. That also gives you time to catch your breath and find out what's really going on, sit down with him after the crush of tax season to look over his books, etc. You might decide to keep him. But, it's too hard to make an informed decision during this stressful time.

Lion,
I pretty much decided to tell them something very similar to this. Not sure I'll be working for them after I break it off, however.

D

[Lion]

Hold

Put the return on extension and your thoughts on hold. This may just be pipe dreams on their part. If they've been good clients with no overt signs of wanting to break laws, look them over after 15 April to see what they're up to. If what they're doing or the way they're doing it makes you uncomfortable, talk to them to see if they'd consider altering their methods. Tell them your concerns. What did their lawyer say? Deal with it after tax season.