Seeking advice on LLC setup with investors

8 Replies

Hi All! 

I am partnering with a friend to start an LLC to purchase multi-units. We will be raising money from friends and are looking at the best way to structure.

I have read an LLC. I have read an LLC with two separate entities. I'm looking for someone who can guide us. Looking to pay someone. Free advice is great, but want to respect everyone's time.

@Joe Brummitt "I have read an LLC with two separate entities."

No tax benefit to using SMLLCs to invest in a MMLLC.  Perhaps a legal benefit.

How are you going to structure everyone's investment?  Equity?  Debt?  A mixture of equity and debt?

All US citizens? LLC taxed as a partnership might be the best way to go. Engage a professional. As you can see, a convo is needed.

@Joe Brummitt As @Eamonn McElroy mentioned, depending on whether you offer your friends to join as equity or debt partners will impact the structure. For example, if you offer them an equity piece and being silent parents, that may be considered a security. Bottom line, reach out to a real estate attorney in your state to determine the best legal structure for your particular case.

Have you spoken with a local attorney @Joe Brummitt ? That would be my best advice, as that is who can guide you about how to set it up properly and do things the right way. There are too many unanswered questions as you see from the comments already made. I agree with @Alina Trigub and would say to contact an attorney to get the best solution for you. 

@Joe Brummitt great question and glad you found an accountant and attorney.

If syndicating a buy and hold property, we generally recommend sticking to LLCs. Others have highlighted asset protection and the fact that LLCs won’t help too with your tax position, which is true for the most part.

What others haven’t mentioned is scale.

A MMLLC (MM = Multi-Member) will cost you significantly more than a SMLLC (Single Member) to maintain. For example, MMLLCs will generally run $1,200+ in tax prep costs whereas a SMLLC does not file a separate tax return and thus avoids tax prep costs (for the most part).

To scale an entity structure without incurring high costs, you and your partner may form a MMLLC that then takes 100% ownership stakes in subsidiary SMLLCs that own the properties (assuming you aren’t syndicating).

Or you may start a real estate fund that is a MMLLC with various share classifications. That MMLLC would then open up a SMLLC for each new project it takes on but it would own 100% of each SMLLC.

When you syndicate deals, the entity holding the asset will generally be a MMLLC. However I highly recommend that you own your GP stake through a separate MMLLC owners by you and your partner (versus owning your GP stake in your personal name). Doing so will allow your MMLLC to take many GP stakes across all of your projects but have all profits/losses flow through one entity = your MMLLC with you’re partner. This consolidation of profits flowing through one entity will allow you to utilize many tax strategies that may not have been otherwise available.

Again, keep scale in mind when you talk to your professionals.