Rental Property Investor · Cranford, NJ · Member since 2019 · 245 posts · 148 votes
Balancing the Pros and Cons for a Real Estate Syndication company. I live/work in NJ but will be syndicating deals out of state as well. My NJ accountant says LLC in NJ, Garrett Sutton (www.corpartedirect.com) goes into great detail why use Nevada or Wyoming.
RE Syndicators please tell me what you picked and why.
There is no S-corp v LLC. LLC is a legal entity that can make an election to be taxed as an S-corp. For syndications, S-corp is almost always the wrong choice, whether it is a "native" S-corp or an LLC taxed as an S-corp. Stay with an LLC or maybe an LP if your attorney recommends an LP.
Which state to form it in is a legal question. Usually syndicators form an LLC in the state where the property is located. Sometimes there're legal reasons to form it elsewhere or have a 2-tier structure. I'm not an attorney, so no advice from me.
There is no S-corp v LLC. LLC is a legal entity that can make an election to be taxed as an S-corp. For syndications, S-corp is almost always the wrong choice, whether it is a "native" S-corp or an LLC taxed as an S-corp. Stay with an LLC or maybe an LP if your attorney recommends an LP.
Which state to form it in is a legal question. Usually syndicators form an LLC in the state where the property is located. Sometimes there're legal reasons to form it elsewhere or have a 2-tier structure. I'm not an attorney, so no advice from me.
@Michael Plaks thank you for taken the time to share your knowledge. Perhaps I am not explaining myself correctly or I am not understanding. In an example my company Senate Syndications syndicates a deal in Texas. A 100 unit multifamily in Austin with 10 accredited investors from different states.
I understand the the Operating Agreement will be in the name of an LLC in this example Austin MF Investment LLC.
But my company, Senate Syndications should be created as a LLC or S Corp. And this entity that I pick will change from deal to deal.
If I understood you correctly, you're talking about your personal entity that you would use as a sponsor/syndicator. This entity will be receiving fees from your syndications and pay you.
If this is what you're talking about, then the question is whether this LLC (pretty much everything should be an LLC, unless your attorney advises you otherwise for specific legal reasons) should elect to be treated as an S-corporation. This question does not have a good generic answer. If someone says - of course, my LLC saved me a bundle on self-employment taxes (a standard sentiment of the proponents of S-corps) - it does NOT necessarily mean that it would be equally helpful to you. Unfortunately, it is case-by-case. Sometimes, even a more complicated C-corp is the best choice, and sometimes just a plain LLC.
It's like keto enthusiasts eat a high-fat diet and praise its supposed health benefits. Other people stay on low-fat diets with equally compelling arguments. What works for one may not work for the other. Likewise with S-corps or almost any tax strategy, for that matter. Trying to follow the most popular route is risky.
Just to add-on, are you listening that S Corp is just an elected tax status? A legal entity such as a LLC or C Corp elects to be taxed as a S Corp. that being said, your comment that you would choose between the two for each deal doesn't make much sense on the surface. Are you going to be making a new entity potentially for each deal and deciding which tax status to use?
Either way, you really need to sit down with a qualified professional or two it sounds like.
There is no way to answer this question without an understanding of someones full financial picture. There are myriad considerations including your active vs passive income. Ultimately, it is a question of if pass through tax treatment is the tax optimized structure for your situation.
@Michael Plaks thank you again for your reply! That was exactly what I meant.
I read Garett Sutton's book. He goes into great depth on the pro and cons. In short he basically says a "business" gets a tremendous benefit as a S Corp. And LLC are great to hold property.
Syndication is a bit of a hybrid. They collect fees and get an owner stake in the property.
Language is going to get you killed, metaphorically speaking. If you are going to syndicate and hold other peoples' asset, you mush learn to speak with precision about fundamental concepts.
Tax election = Found under the FEDERAL Internal Revenue Code; S-corp or C-corp
An LLC can be taxed as an s-corp, c-corp, or disregarded entity for tax purposes. The tax pros can be more specific, but there are limits to qualify for s-corp election.
Legal benefits of limited liability companies for holding real estate are different than the tax benefits of s-corp election. And the benefits you are seeking may be differently structured if you are talking about the operator entity (the GP or manager-member) or the passive investor entity (the LPs or members).
Seems this is too delicate a topic not to speak to an asset protection attorney. But wish to thank you all for your input. We'll see what happens after a convo or two.
Seems this is too delicate a topic not to speak to an asset protection attorney. We'll see what happens after a convo or two.
I agree. Frankly, I exited this conversation after seeing that you do not have enough understanding of the concepts you're discussing, yet seem to be set on DIY. I'm glad @Jerel Ehlert pointed it out.
With syndications, you have serious responsibilities to your investors and related legal liability, so it's a very good idea to engage professionals in the process. All the best.
@Michael Plaks I was just curios what entity RE Syndicaters before me have used. I have no intentions of DIY. But thank you for clarifying.
The answer is - it depends. Some use no entity at all. Some use a disregarded single-member LLC. Some elect such an LLC to be taxed as an S-corp. Some elect it to be taxed as C-corp.
You read that an S-corp is the way to go, and we say - not necessarily. Corporate elections are not recommended as a general rule, because they may end up being counterproductive. It is case-by-case.