San Diego attorney

	Home
	Articles
	Business Entities
	Contact
	FAQ
	Interviews
	Sites We Like
	Testimonials

Protecting Publicity-Shy Investors
Richard A. Chapo, Esq.

Turning a business idea into a functioning enterprise requires a certain amount of startup capital. Most individuals look to friends and associates for financial investments to get the business up and running. A potential hurdle to obtaining investments can be the fact that the investor does not wish to have their involvement made available to the public or media. In such a situation, it is fairly simple to overcome this concern while providing the investor with the protection they require to secure their investment. The strategy involves the use of two corporations and a written option.

To "hide" the involvement of our publicity-shy investor, we are going to first form two corporations. The "At Risk" corporation will conduct the business envisioned by the business owners. The second corporation will be a holding company. The investor will contribute his investment to this second corporation. The second corporation will then loan the startup capital to the At Risk corporation. Normal and customary loan documents will be drawn up for the loan and the At Risk corporation will make payments on the loan to the second corporation. At this point, however, the investor is not protected from the possibility of the At Risk corporation withholding payments. To cover this possibility, the investor will be given a written option to purchase shares in the At Risk corporation for a nominal amount of money. In so doing, the investor will be able to take a shareholder position in the At Risk corporation to protect his investment if necessary. Let's look at an example.

Restaurant Example

I decide that I want to open a restaurant in San Diego and ask you to invest $100,000 in the business. You know that the restaurant business is volatile and do not want your name in the paper if the restaurant fails. To satisfy your concern, I will form two corporations, Chapo Restaurant, Inc. and Investment Company, Inc. I will issue you a shareholder position in Investment Company, Inc., but not in Chapo Restaurant, Inc.. At the same time, I will issue a written option to you to purchase shares in Chapo Restaurant, Inc. at a later time should you so desire for a nominal dollar amount. You will then contribute the $100,000 to Investment Company, Inc., in exchange for your shares. Investment Company, Inc., will then make a loan, with signed loan documents, to Chapo Restaurant, Inc. If Chapo Restaurant, Inc. fails or is sued, your identity will be protected because you are not associated with the company.

In pursuing this strategy, consideration has to be given to the amount of the investment and the projected return on investment. You are strongly encouraged to consult with both an attorney and CPA to avoid potential problems.

Send to a Friend

Richard Chapo is the lead attorney for SanDiegoEsquire.com, based in San Diego, California. He can be contacted at Richard@SanDiegoEsquire.com. or 619-992-1867. This article is for general education purposes and does not address every facet of the laws surrounding the subject. Nothing in this article creates an attorney-client relationship.