In this two‑minute tax and legal tip, CPA‑attorney Mark J. Kohler explains how to bring significant investors into a small business while avoiding securities‑law pitfalls. He first warns against casually using the word “investor,” noting that the SEC may treat anyone who contributes money for profit as an investor and could pursue criminal liability if the money is lost. Kohler then defines three precise terms: (1) lender – a party that provides a loan documented with a promissory note or security interest; (2) investor – a silent money provider who expects a share of profits but has no management control, exposing the business to SEC scrutiny; and (3) partner – an active participant with voting rights, typically structured via an LLC or joint‑venture agreement, which avoids the “investor” classification. He stresses the need to use the correct terminology, properly document the arrangement, and consult a business or securities attorney to stay compliant. The segment concludes with a brief promotion of his podcast, blog, free ebook, and other resources for small‑business owners.
Chapters
Hi, Mark Kohler here with another two minute tax and legal tip. Let's talk about techniques to bring on investors into your business. And I'm not talking about crowdfunding. I'm talking about significant money with just a few individuals that you need to take your business to the next level. Now, the first important point here is to talk about the terms you're using when you're talking to others about bringing on money into your business and and how we are going to talk about this topic here for the next couple minutes. First, let's talk about the term investors in and of itself. That's not a term I like to use. And you've got to be careful when you're talking to others about putting money into your business and calling them investors. The SEC or Securities and Exchange Commission would be very concerned if you were to lose someone's money where in their mind they were thinking of themselves as an investor and you called them an investor. They so this is a big topic, but let me define three terms that I think are important to use when you're talking about money coming into your business. The first term is lender. Not an investor, but a lender. They're going to loan you money for a return on their investment and interest rate and you're going to memorialize that with a promissory note and maybe even a trust deed where they get security in some property in the business or maybe even stock of the business. But that's a lender, not an investor. Use that term carefully between lender and investor. When you're talking to someone about loaning you money, use the right term. Now let's define the term investor. And as I mentioned a little bit earlier, that is a person that's going to give money with an expectation of profit. And the SEC may even call that a silent investor because they don't have any real say in the business or management control or voting rights. They're just going to sit back and get money if you make money. Well, folks, those aren't lenders and those aren't partners. Those are investors. And if they're a silent investor and you lose their money, you could go to jail. So you got to be really careful when you take money from people and call them a silent investor. Get a consult from a business attorney or securities attorney on how to structure that so you can take money from a investor. The third term I want to introduce to you is the term partner. And I love the word partner because they're going to have voting rights and they're going to be in the mix with you. Maybe even if they're a minority partner, it's okay. But they're going to have voting rights and they're not just going to sit back and expect profit. They're going to be involved and be informed. That's a partner, not an investor. And you have to treat them like a partner. And that's okay because you can get out of all those investor rules. You're typically going to memorialize that with an llc, limited liability company or joint venture agreement or something other than a lender, or treating them like an investor. So think about that partnership when you want to bring on money to keep you out of harm's way with the Security and Exchange Commission. Finally, as you can see, this is a huge topic and I just scratched the surface. Please be careful when you're taking money from others, understand the terms you're using, and consult with an attorney always in this process and make sure you document it properly. You lose someone's money, it could be devastating for you personally and for your business. Now I've got tons of information on this in my ongoing podcast and radio show in my blog articles. So please learn more about this from someone if not from me. Thanks for listening and I hope that information was helpful and let me speak from the heart here. I've been talking about topics like this for 1015 years. I'm a CPA attorney, best selling author, radio show host and I am passionate helping small business owners save taxes, build wealth and protect it. Please check out the link right here. Download my free ebook on 10 Common Mistakes Small business owners make in the tax and legal arena. Also check out my social media links here. I've got Daily Tips, a weekly blog radio show every week. This information is free and I'd love to help you. Click below. Find out more about me and thanks for listening.
