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Question about "capital contributions" to an LLC

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pspock

Junior Member
I'm going to talk to my lawyer after the 4th, about this... but I wanted to get some quick opinions about this as I'm just too impatient.

I want to understand if unpaid loan installments, or a defaulted loan, would apply as "capital contributions" under this Ohio Revised Code:

1705.24 Vesting of management authority.

Unless otherwise provided in writing in the operating agreement, the management of a limited liability company shall be vested in its members in proportion to their contributions to the capital of the company, as adjusted from time to time to properly reflect any additional contributions or withdrawals by the members.

Effective Date: 07-01-1994
Long story short.... I wrote a business plan, had it reviewed by the local chamber of commerce, got the thumbs up, gave it to potential investors, they invested, set up an LLC with the intent that my in laws would be 51% owners and my wife and I would be 49%, they put in $10K, we put in $9800... but my wife and I also made a loan to the LLC for $14,400 with a promissory note specifying 60 monthly installments of $291.74 begining July 15th, 2010.

Once the business began operating, the in laws completely ignored the business plan and were doing business with a "Field of Dreams" strategy.... "if we sell it, they will come". Their unwillingness to cooperate with the business plan is also reflected in this dumb action on their part... they refused to sign the operating agreement that Legalzoom provided us. In the operating agreement it specified that they own 51%. However, since they refused to sign it, it is null and void.

That's where 1705.24 comes in. They put in $10,000 and we put in $9800. Just by looking at those alone, 1705.24 says they own 51%. However, because they failed to execute the business plan, the business checking account has been running on fumes for the past year, and as a result we have not received one payment on our promissory note.

The promissory note specifies this:

Acceleration – If any of the following events of default occur, this Note and any other obligations of the Borrower to the Lender or Note Holder shall, at the option of the Lender or Note Holder, become due immediately, without demand or notice:

1. the failure of the Borrower to pay any Monthly Payment in full within Fifteen calendar days from the date it is due;
My view is this... if our $14,400 promissory note is in good standing, meaning all installments have been paid, today it is worth $12,171, which is the interest minus $3209 worth of installments paid. However, since we didn't receive the paid installments, those paid installments on the loan in good standing is our cash sitting in the company's checking account. If that $3209 is our cash, and it's not a loan (the loan is the $12,171 remaning principal, not the $3209 in paid installments), and since we haven't withdrawn it, then it is a "capital contribution", which under 1705.24 vests us more authority.

My other view is this... if out $14,400 promissory note is NOT in good standing because of all the missed payments, then the Acceleration clause of the promissory note has made the entire note due immediately. It's no longer a loan... it's our cash, that's not a loan, and since we haven't withdrawn it, then it is a "capital contribution", which under 1705.24 vest us more authority.

Thoughts?
 


LdiJ

Senior Member
I'm going to talk to my lawyer after the 4th, about this... but I wanted to get some quick opinions about this as I'm just too impatient.

I want to understand if unpaid loan installments, or a defaulted loan, would apply as "capital contributions" under this Ohio Revised Code:



Long story short.... I wrote a business plan, had it reviewed by the local chamber of commerce, got the thumbs up, gave it to potential investors, they invested, set up an LLC with the intent that my in laws would be 51% owners and my wife and I would be 49%, they put in $10K, we put in $9800... but my wife and I also made a loan to the LLC for $14,400 with a promissory note specifying 60 monthly installments of $291.74 begining July 15th, 2010.

Once the business began operating, the in laws completely ignored the business plan and were doing business with a "Field of Dreams" strategy.... "if we sell it, they will come". Their unwillingness to cooperate with the business plan is also reflected in this dumb action on their part... they refused to sign the operating agreement that Legalzoom provided us. In the operating agreement it specified that they own 51%. However, since they refused to sign it, it is null and void.

That's where 1705.24 comes in. They put in $10,000 and we put in $9800. Just by looking at those alone, 1705.24 says they own 51%. However, because they failed to execute the business plan, the business checking account has been running on fumes for the past year, and as a result we have not received one payment on our promissory note.

The promissory note specifies this:



My view is this... if our $14,400 promissory note is in good standing, meaning all installments have been paid, today it is worth $12,171, which is the interest minus $3209 worth of installments paid. However, since we didn't receive the paid installments, those paid installments on the loan in good standing is our cash sitting in the company's checking account. If that $3209 is our cash, and it's not a loan (the loan is the $12,171 remaning principal, not the $3209 in paid installments), and since we haven't withdrawn it, then it is a "capital contribution", which under 1705.24 vests us more authority.

My other view is this... if out $14,400 promissory note is NOT in good standing because of all the missed payments, then the Acceleration clause of the promissory note has made the entire note due immediately. It's no longer a loan... it's our cash, that's not a loan, and since we haven't withdrawn it, then it is a "capital contribution", which under 1705.24 vest us more authority.

Thoughts?
To recap, you want to know if you have greater authority to make decisions for the LLC because you feel that you have invested more money than your inlaws.

At the moment that is not true because your "investment" is only 9800.00 and the 14,400.00 is still an outstanding loan/liability of the LLC. You will not have greater authority unless you all agree to officially change that loan to a capital contribution. The fact that the loan payments are overdue doesn't convert any of it to capital.

If the business is running on fumes, that may or may not be a good idea. Its a good idea if you think that in taking over you can save the business and make it profitable. Its a bad idea if the business is destined to fail, because your 14400.00 loan would have a greater claim on any assets that could be liquidated if it remains an outstanding loan.
 

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