Capital contribution?

Discussion in 'Professional Trading' started by Zap777, Oct 31, 2003.

  1. Zap777


    Hi All - Have a question about capital contribution. Obviously, anything you put into an LLC is at risk if the firm goes belly-up. Suppose the firm does not require capital for trading/leverage purposes, but requires a "bond" against potential losses. Furthermore, you have an agreement with the firm to place a small amount of cash (<$5000, for example) to protect against blow-ups in the beginning. Could the cash be placed in escrow such that the firm can access it if the trader blows up, but not in any other case? Any potential problems/pitfalls with this scenario? Any thoughts would be appreciated. Thanks.
  2. if you cant trust the company you are working for a lousy 5k what are you even doing working with them?
  3. Hi Zap777:

    This question does not really present a tax issue, rather it is a legal question--more specifically, these facts present "contracts" issues.

    What exactly does the agreement between you and the LLC provide as to the terms and conditions under which (a) the bond of forfeited, or conversely (b) the bond is exonerated back to you? Further, does the agreement specify what rights creditors of the LLC have against the bond? The usual rule is that the LLC's creditors have the same rights to the LLC's "property" (read: the LLC's contract rights against the bond) as the LLC has. But sometimes clever drafting can restrict the creditor's rights, at least to some extent.

    As to placing your $5k into an escrow account, this is also a matter of contract. If the LLC will agree to it, fine. But as you suggest, the escrow document needs to be drafted to restrict the LLC's rights to the money only if you "blow up" [whatever that means]. In that event the LLC creditor's rights against your money would be no greater than the rights of the LLC itself. As indicated above, it might be possible with clever drafting to restrict the creditor's rights even further, to one degree or another.

    Kinda complex, isn't it? Bottom line is that all these issues are a function of the contract rights of the parties, and it is impossible to opine further without a complete review of all the relevant legal documents.
  4. Zap777


    jwishcamper - Thanks for the reply. You make some good points...seems like it's all a function of how the contracts are written. Good food for thought.