When a business is organized, whether as a corporation or limited liability company, the business entity will need to issue to its founding owners their ownership interests (which are securities). The easiest and most straightforward way for founders to acquire their initial ownership interests is by purchasing the interests for cash consideration. But the entity can decide to issue its securities in exchange for other than cash consideration.
Other forms of consideration that are also acceptable include (i) labor performed by the given founder, (ii) services rendered to the business, such as in forming the business, and (iii) property received by the business from the founder. But be careful, the business cannot issue securities to any founder if the only consideration is a promise of future services or a promissory note that is not properly secured by collateral.
Once it has been determined what consideration each founder will exchange for his or her securities, the business entity must take the proper actions prior to issuing the securities. This means that the board of directors or managers must approve at a meeting, or by unanimous written consent, the business entity’s issuing the given securities for the agreed upon consideration.
The securities so approved to be issued must only be issued after the consideration has been received from the founder to whom the securities are being issued. Each founder should also execute an agreement setting forth the founder’s investment intent. Finally, because issuing securities to the founders is subject to the securities registration and qualification rules under federal and state securities laws, the proper notices and filings must be submitted to the appropriate regulatory agencies.
This discussion is not legal advice, a solicitation of you as a client, nor the engaging in the practice of law in any jurisdiction. This discussion is merely for information/education and should not be relied upon for legal advice by anyone because the facts discussed may be different from your own situation. If you need legal advice, consult a qualified attorney. For more information please visit my website at http://www.palacioslawoffice.com.