Raising money through promissory notes means managing a hundred separate contracts with different terms and maturity dates. An LLC interest offering puts all investors under one operating agreement with uniform rules and built-in protections against bad distributions. Notes create more litigation risk when they default.
A promissory note offering isn't the simpler version of a fund that sells LLC interest. It's 100 separate contracts instead of one LLC operating agreement. When you raise through LLC interest, every investor holds a share of the same entity governed by the same operating agreement, subject to the same distribution rules. If making a distribution would bankrupt the company, the State Limited Liability Company Act where the entity is formed usually prohibits A promissory note offering is different. Every note is its own contract. Terms can vary note to note— different rates, different maturity dates, different investors negotiating different deals with you individually. That's not one relationship to manage; that's as many separate legal obligations as you have notes outstanding. And a note obligates you to pay on its terms, whether or not you're able to. Whether or not the underlying business made money. There's no equivalent of the LLC Act's built-in protection against a distribution that would bankrupt the company. If cash is tight and you miss one payment on a loan, that's a default. Miss payments broadly and you don't have one dispute, you have a cascade of individual defaults, each one a separate potential claim. 100 investors under one LLC is one structure to defend. 100 investors under 100 notes is 100 separate obligations that can fail independently. Which structure fits your offering is a seminal decision that you should carefully consider before you start raising capital, not after. Schedule a call with us and we can tell you how we can help. The link is in the bio.
