What makes sense to Raise Capital..? S-Corp Reg D or LLC Reg D

Question

Getting everything legally set up before raising capital is very important. Underwriting deals from 20+ units to 100+ units and learning how to present it to passive investors is an art. Having the legal side of things is the most important part. I have an LLC but I want to build a fund or raise capital properly for significant income producing apartment buildings in various areas around the country. What should be the first step or what are the steps to legally raising capital.

Evan Polaski · Answer

@Anthony Rivas, what you are mentioning seems to be why a lot of syndication "gurus" mention recommend making LP investments as part of the learning process.  To talk with investors, you should be able to think like an investor.  And to think like an investor, being one is a great way to learn what is important, how things work, where pain points are, etc.

Your best bet is to talk to a securities attorney.  While I believe an S-Corp can pass through losses, the biggest issue is likely the 100 shareholder limit.  Depending on the size of your deals and minimum investment amount, you could blow right through that limit.

Most syndications I have been a part of over the last 15 years have been formed as either LLC or LPs.  I am sure there are nuances between the two, but from my perspective as an LP, it can't tell you why one is chosen over the other.

Beyond that, you can legally raise capital under a multitude of rules.  Reg D and SEC rule 506 b or c are the most common, but again, a securities attorney can explain the differences and other options that might be open.  I know of some syndicators that use other regulations, some of which allow for large numbers of non-accredited investors.  Cardone Capital recently launched a filed offering to accept non-accredited capital.  You can be setup as a private REIT, a public non-traded REIT, an LP, etc.

Basit Siddiqi · Answer

@Anthony RivasThe first step is knowing how the entity selected will impact the investors.

Ronald Rohde · Answer

These are two different concepts, tax status vs legal liability. Tax has no impact on legal structure for liability.

If youre doing Reg D, they are typically set up as pass throughs.

Taylor L. · Answer

Most of the time syndicators will use LLCs because LLCs are pass through entities. Early on it's all about getting educated.