LLCs and Convertible Debt – Too Good to be True?

Guest post by Scott J. Pinarchick, William J. Bussiere, Jr. of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.

Founders choosing a structure for their business are often drawn to the limited liability company, or LLC, for its overall flexibility in both taxation and governance matters. And founders seeking access to early capital, not to mention seed investors themselves, are often drawn to the convertible note as a simple, less expensive means to raise funds. But LLCs and convertible debt don’t always mix. LLCs are generally treated as partnerships for federal income tax purposes and the rules regarding debt in a partnership are different than that of a corporation.  LLC members should be aware of the risks associated with the issuance of debt instruments and when such debt is repaid, converted, assumed or discharged.

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