Investors are usually seeking a more formal business entity to invest their money. Since an Idaho LLC is held to little requirements concerning management structure, it is easy to destroy the limited liability protection. One of the first moves a creditor or lawsuit will make, is to show that the non-working partners are involved personally. This removes the limited liability barrier and opens the investors up to personal liability.
In addition, investors in LLC’s find it difficult to determine what their money is going to, whether it’s being spent appropriately, and the value they are receiving since there is no stock.
To make matters worse, it is very possible for investors to be distributed a K-1 on profits in which they were never paid. Since an Idaho LLC is still a pass-through entity, all profits on the books will trigger a total payout at the end of the year. Many times, extra profits are being used for operating cost, payrolls, expansion and so on. It may also be an internal issue concerning bad bookkeeping and accounting systems.