Mark J. Kohler breaks down three ways to classify people who give money to your business or real estate deal: lender, partner, or investor. Mislabeling them, especially calling a partner an investor, can trigger SEC violations and criminal liability. Each requires different legal documents, from promissory notes to partnership agreements to regulated offerings.
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Hi, Mark Kohler here with a tax and legal tip that is so important that it could save you a lot of money and potentially getting in a huge lawsuit with a potential partner, investor or lender. That's right. This is all about how to classify the person you're going to be working with or persons that are providing money to you and your small business or real estate project. So listen up. This is a big deal. Now, this is also a big topic. I've got a good half hour longer video in my video library, and this is a whole chapter in my book, the Tax and Legal Playbook. At the end of this video, I'll give you a couple references on where to study up more on this, but I want to just give you again, a cursory knowledge of the issue here. And here's the biggest takeaway. Don't call anybody an investor. When you go out and say, oh, I'm looking for an investor, that sends out a code word that could get you in a lot of trouble with the securities and Exchange Commission, the sec, and that could be a federal issue or even a state issue. Because if you call someone an investor and lose their money. That's right. You could be going to jail. So make sure that you don't use the word investor until it's appropriate. Now, as you can see with the title of this video, there are three classifications. There is the lender, there is the partner, and there is the investor. Now, each one of these people are different. You cannot have someone that is in several categories. They have to be in one category. So, for example, if you're going to borrow money from someone and say, hey, I've got this real estate deal, I'm going to borrow it 8% and give you a couple points, and you're going to sign a promissory note with them, then they are a lender. You cannot say, oh, and I'll give you 20% of the profit on the back end. Okay? That doesn't work. Now they're a partner because they're getting a piece on the back end and they're just sucked. They just got sucked into any potential lawsuit because they're now a general partner with you. Then you go, well, Mark, there's these participating notes where they're going to be a lender and get a piece of profit. Yeah. Explain that in court. When you have a general partnership scenario and someone got ripped off, anybody that gets a piece of the action becomes a partner. So if they're a lender, they're a lender. They get A promissory note, they get a trust deed, whatever, some security. That's great. Lenders are cheap. We want lenders because you just give them interest in a couple points. But if you want someone to put money in your project, we're talking partner. Now, I like the partner option because it's the safest option for securities issues. And you're not going to call them an investor. You're going to say, do you want to partner with me? And it could be in a business or a real estate project and they're going to get a percentage of the deal and they're going to put money or services in the. In the project or deal. Right. They're going to put in money or service and you're going to document this bare minimum with a joint venture agreement or some sort of partnership agreement. That's bare minimum. I'd like to see an LLC structure with even S corporations in the mix or at least just a basic LLC with an operating agreement. Guys, you don't want to be knocking this out on your own on some Google site where you just get a template. These are major important legal issues. And if you're going to be partnering with someone for thousands of dollars, you don't want to play lawyer in this situation. And I get it too. You don't want to spend thousands of thousands of dollars with this. But get a document, have a lawyer review it, and warn you as to some of these issues. It's something that we do all the time in our law firm very affordably for clients. But that's the partner option. They get a voting right. They're not in the dark. And if you call them a silent partner, that's an investor. And there you go. Investor, silent partner equals investor. They're going to put in money and then they don't get to vote. They're going to sit back and you're going to do whatever the heck you want with the project. Right? That's what you want. You just want someone, hey, come invest with me and I'm going to go out and make money and give you some profit. But I'll call you when it's all over. Then you lose their money. And there was not the proper disclosures or disclaimers or SEC or state or federal documentation. When you took someone's money and made promises and they didn't get kept to date and they didn't get to vote. Oh my gosh. This is where the investor issue arises. Now, I love investors and I want you to put together your own little fund of 500 grand or a million dollars and start your business or do real estate. But you have to set up what's typically called a PPM or a Reg D offering and go through the rules of how you take money from people. Crowdfunding falls into this too. You've got a bunch of investors are going to put in a few thousand dollars. Those are investors. Bottom line, you've got to know this. You've got to know the difference between lenders, partners and investors. And use the right terminology, it' keep you out of hot water. This goes from a promissory note to an LLC to a ppm, a private placement memorandum. Our law firm does all three and everywhere in between. Just get a lawyer involved to help do it right. You're taking thousands of dollars from someone and when you do it right, you earn their trust. And you know what my experienced project managers or deal makers or business owners? It's easier to find money than to find deals. Because when you do it right, people trust you. So learn about this. You're going to love it. And you can get more information about this on my website with some information to follow and from my book, the Tax and Legal Playbook. Learn it and be careful. Thanks so much for watching and if you found that helpful, please look in the description below. I've got links to my tax and legal library, my QuickBooks, training videos, how to start a small business 50, 60, 70 videos, some as long as 30 minutes expand. Need more information on tax and legal strategies that will change your life? Also, if you'd like to subscribe to my newsletter or check out my social media links, please click here. There are weekly free tips and strategies and articles that you'll find extremely helpful and I would appreciate it if you'd subscribe to my channel. 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