First let me say I would GREATLY appreciate any help or advice I could get from this group...
I am currently negotiating my position in a property management company (MGMT LLC). The arrangement is somewhat complex so please follow along.
- The management company was created for the purpose of managing another LLC (PROP LLC).
- PROP LLC is a holding company for all properties that will be acquired by my group in the near future.
- MGMT LLC will have 1% ownership of PROP LLC while another group of investors (INVEST LLC) will take 99% ownership of PROP, LLC
- MGMT LLC will take 50% of the Cashflow from PROP LLC and another group (INVEST LLC) will take the other 50% of cashflow.
I am negotiating my interest in MGMT LLC.
- The original offer on the table was 16% of ownership of MGMT LLC which equals 16% of revenue share from MGMT LLC... I turned this down.
- The new offer is 0% of ownership and 20% of revenue share. Negotiations stopped here.
I am happy with 20% rev share but am concerned about the impact of 0% ownership...Also, it should be known that MGMT LLC does not have an intention of acquiring ownership in anything moving forward other than the 1% ownership of PROP LLC and the 50% of cashflow from PROP LLC. It should also be stated that I'm in a position where building my balance sheet is important to me. I'm young and don't have much of a financial track record yet...
1. What are the tax implications that I should be considering?
2. What are the balance sheet implications? (e.g. how will a bank view me differently in one scenario or the other)
3. What are the implication in terms of control over my piece of the pie (e.g. can I be forced out for little interest, etc.)
4. What are the other implications that I don't know I don't know?
Quick Advise would be greatly appreciated as negotiations will be finalized tomorrow morning.
If your an owner in the LLC you will have a partnership interest that would include your original basis and adjustments that are made each year. The market value of your holding will be what you would report on your personal balance sheet. In one case you would have a stake in the other you would not.
As a part owner you would get a K-1 showing income and expenses. Otherwise you would receive a 1099 for income received.
Hey Ryan, welcome to BP!
Its hard to say witthout all the details, but here's some of my thoughts.
What are you bringing to the deal to earn your share of ownership/profit?
You said 16% ownership = 16% revenue. Do you really mean revenue, or is it net income? You should make sure you get the term revenue defined.
Does MGMT LLC take on any debt or guarantee any liabilities?
16% or 0%, either way you don't have much control. So, what are the benefits of ownership?
Check with your CPA, but usually the nature of income you are allocated will be the same as that received by MGMT LLC from PROP LLC. In other words if MGMT receives net income from real estate activities, then your share will be considered the same on your personal return.