Today I want to talk about joint ventures. Let’s say that Paul wants to start a new California business and he needs capital.
Paul is introduced to Linda who is willing to invest the required capital in exchange for a share of the profits when the business is sold. They agree on a profit split and Paul starts his business.
The business is successful and sold one year later. Linda’s share of the net proceeds yielded her a 25% return on her investment.
Paul never expected this kind of quick success. He also thinks that he should have simply borrowed the capital. He knows that loans may be subject to the current California usury law rate of 10%.
He wonders if his arrangement with Linda violates the 10% cap. He also understands that if Linda made a loan and it violated the California usury law, then he may recover three times the amount of “interest” Linda collected from Paul.
Can he do that? The answer is no. An investment in a joint venture in exchange for a share of profits is not a loan subject to California’s usury laws.
A discussion by the California Appeals Court on this subject is found in the case of Ambrose v. Alioto, 65 Cal. App. 2d 362 and can be found at: https://law.justia.com/cases/california/court-of-appeal/2d/65/362.html
Comment. If Linda loaned Paul the money, she risks Paul not honoring his promise to pay her principal and interest. When Linda invested in Paul’s business in exchange for a share of the profits, she also risks Paul not honoring his promise to pay Linda her share of the profits. But Linda also risks losing her entire investment because the business may fail. That additional risk takes her deal out of the loan category and thus Paul’s deal with Linda is not protected by California’s usury law.
By John McCauley: I help people start, grow, buy and sell their businesses.
Email: jmccauley@mk-law.com
Profile: http://www.martindale.com/John-B-McCauley/176725-lawyer.htm
Telephone: 714 273-6291
Check out my book: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles
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