An LLC, The SEC, and me

4 Replies

So many threads on this topic and yet very little clarity for me. 

One in particular peaked my interest ( @J Scott, Jillian Sidoti, Bryan Hancock, and Chris Martin all had good comments.

I want to go into my attorney with a little foreknowledge so I am comfortable they know what they are doing.

I'm thinking of a structure that will help me start a flipping venture to help me fund buy-and-hold independently:

  • Form an LLC with a friend or family member I have known for a while.
  • They may or may not live in my state. For the sake of clarity, let's assume they do not live in my state.
  • We are "equal" partners in the company and are treating as an S-corp for taxation purposes.
  • I'll take a nominal salary as the President, they'll take one as the CFO. The salary is reasonable (not $1/yr or anything like that). Maybe something like $15K each the first year.
  • My partner is responsible for funding our acquisitions, likely with personal funds.
  • I'm responsible for finding, managing the rehab, and selling the properties.
  • We each take equal distributions of profits.
  • We must both agree that a deal makes sense and have paperwork (e-mails and the like) between us.
  • We'll likely keep operating this way over the course of a couple of years.

So I don't think this really is an SEC thing, since we are agreeing to partner and both work it. We both have to make agreements, and we'll both have to meet regularly to talk business. But I'd like to make sure of this assumption. What would a good CPA and attorney ask me or suggest?

Second, when I do talk to the attorney, I think my biggest concern is around the salaries and dissolution piece. 

I know a lot of people will use the 50/50 split without an LLC or anything like that. But then it feels like it could be considered a security if they weren't actively involved in the rehab process. Especially if they aren't what is considered an accredited investor.

1) Would love some feedback what I should be asking the attorney and CPA.

2) Would like your feedback on the proposal itself.

You seems just a bit paranoid about the SEC. You can partner up with anyone you want and neither of you have to actually take salaries or any of that. An LLC is an agreement between one or more persons to run a business venture. The SEC does not get involve nor regulate such activity.

That said do not go and try to get people you don't personally know to invest in a venture with the PROMISE of future returns. Think selling a stock kind of a position. Having someone provide you a mortgage on a property goes into the gray area here but doubt the SEC will come looking for you as long at the Note is secured.

Now if your plan is to have multitudes of people invest in the LLC so you startup some big fund to do flips - Then you may want to talk to an SEC lawyer. CPA no good - Your need the lawyer.

Yeah, that paranoia thing can get one in trouble, which is why I had enough and decided to ask.

I think I have my wording correct, but I'll make sure the lawyer agrees...

@Tom Spaeth thanks so much!

The SEC thing isn't going to be a problem. You're not selling securities, and your probably not selling stock in your LLC

You won't get great LLC advice here on the forums because your corporate structure is too personal to you and your strategy. The best way for that to be set up correctly is to do it specifically for your situation and an experienced RE/Asset Pro attorney will be able to do that for you.

Being, or not being accredited probably isn't going to be an issue for you guys right now - unless you're planning on doing something like a PPM of a completed project, then you'd be dealing with securities regulations and accreditation requirements. 

As far as distributions go between the 2 of you, you and your partner will probably want to ask your CPA how you should handle that stuff. You might issue payroll, or you might do K-1's, or you might just do w-2's. All of this is going to be very specific to your LLC and overall biz structure and operations. Way more personal answer than you're going to find here on the forums

You may be selling a security. Just because you know someone doesn't render it not a security. Just because they have some involvement in management doesn't render it not a security. 

You need to be able to give all the details to the lawyer. Do not take securities regulation advice from a CPA. You should ask the lawyer if the S corp interests are a security and if so, what exemptions do i need to meet at the state(s) and federal level. 

Just go talk to an LLC lawyer in your jurisdiction.

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