Can Foreign Investors Invest in an LLC?
Companies need funding to support expansion, and they obtain that funding from debt, equity or a hybrid of the two. Although fewer business owners seek funding from equity provided by investors, those who do find equity can provide them with both capital and expertise. When a company operates as a limited liability company, it can solicit and bring on new investors as members from various sources, domestic and foreign, including corporations, individuals and partnerships.
State laws govern the formation of an LLC. Federal laws that govern ownership, boards, directors and officer requirements do not apply to LLCs they way they do for corporations. Instead, an LLC's operating agreement is empowered by state statute with decision-making authority and guidance. The operating agreement governs the management and operation of an LLC, membership interest ownership rules and the LLC’s period of existence, if specified. Therefore, an LLC has significantly more administrative flexibility than a corporation.
LLC owners are called members, and ownership interests in an LLC are called membership interests. State laws place no restrictions on LLC members, permitting corporations, individuals, partnerships, limited partnerships and other LLCs to own membership interests in an LLC. In addition, foreign individuals or entities can own a portion or 100 percent of the membership interests in an LLC. When creating an LLC, the founding members or their agent must file organization articles with the secretary of state of the state in which the LLC primarily operates. The articles typically must list all the current members and specify whether the member is a person or a business entity.
When bringing on new foreign investors, the LLC must create a thorough operating agreement, if one does not currently exist, or amend the existing agreement if one does. The existing members will need to confer with the prospective foreign investors to properly structure the agreement to protect their interests and address any tax or legal concerns they may have. LLC members can consult with an attorney to properly structure the operating agreement.
The operating agreement may need to specify particulars that could be considered obvious for a domestic investor -- for example, contribution of funds in U.S. dollars. A well-written, detailed operating agreement addresses potential issues and worst case scenarios that could derail the LLC. These scenarios include the sale of membership interests, the distribution of profits, control and management of the LLC, and actions that occur upon the death or disability of a member.
For foreign investors who invest after formation, LLCs may need to amend their articles of organization to include the new member additions. Other LLCs may need to update annual registration documents to include the new members. Because the required actions depend on the state, LLCs must confirm the requirements with their state’s secretary of state.