Accredited Single Member LLC Pass-through Investment

5 Replies

This is my very first post, but hopefully it makes sense:

So I have a few investors interested in investing in multifamily. Unfortunately only one is technically defined as an accredited investor. All others are interested, but are not accredited investors. As a group, we were thinking of investing through an LLC owned by the single member that is considered an accredited investor. This way, all investors can still invest in a 506(c) deal if they put their funds into the LLC account which would invest in a 506(c) deal that was only for accredited investors.

The LLC was formed in California and all but one investor are living in California. Please share if you know more info on this. Concerns are how the LLC and all investors will be taxed and if all investors will be able to use the deal as a tax-write off if the deal invests in a property that has a high cost-segregation deduction on their first year for example.

Feel free to share any info!

I think you need to be careful and speak with an attorney familiar with business law and accredited investors.

What you will have on paper and what's actually going on regarding this LLC are two different things... You might be setting yourself up for trouble... I'll leave it at that.

Your last paragraph further reinforces that this is actually a multi-member LLC and not a single-member LLC as the "investors" are obviously being treated as equity investors (aka members) and receiving a flow through portion of the LLC's profit and loss.

"Concerns are how the LLC and all investors will be taxed and if all investors will be able to use the deal as a tax-write off if the deal invests in a property that has a high cost-segregation deduction on their first year for example."

Not likely. The flow-through rental real estate losses would generally be passive. Unless the LLC members have other passive income, the passive losses will be suspended and carried forward to the next tax year.

@Cindy Cabrera how you will be taxed shouldn't matter because this approach isn't legitimate and shouldn't be attempted. For an LLC to invest in a syndication, every member of that LLC must be accredited, not just one.

I'm sure you can get away with it initially, but you're asking for trouble if or when the Sponsor or SEC finds out. You can talk with a securities attorney, but I'm sure they will tell you the same thing.

Your best bet is to find a 506b offering that you can legally invest in as sophisticated investors. Feel free to reach out with more questions.

@Michael Bishop  and @Eamonn McElroy have it. Single member aside, for a company to be considered an accredited investor, all members have to be accredited.

Need to be real careful. From my understanding if you have a 506c you cannot bring in non-accredited investors into that. @Jillian Sidoti can confirm that if I'm wrong. I know your intentions are good but you may need to consult with a SEC attorney. Jillian that's where you come in. 

If you structure it as a 506b raise, you can take money from up to 35 non-accredited investors. problem solved. i'm assuming though that this is your deal (you're the sponsor), and not you trying to invest in someone else's deal.