LLC or Tenants-in-Common - which is best for 401k funds?

Question

What are the pitfalls and advantages to setting up either an LLC vs simple Tenant-in-common ownership when investing 50/50 with a partner where I am using solo 401k funds and the partner is using their own funds? Other than asset protection on the LLC side, I see no other advantage over going with a TIC setup. The cost factor of setting up an LLC is a potentially the biggest drawback of that setup, along with end of year reporting and K1's etc. This would be for a rehab/rent/resell of one property.

Basit Siddiqi · Answer

@Lori Lloyd"where I am using solo 401k funds"

If you go the tenants in common route, it will likely be that the retirement account will be listed as the owner and not you.
If you combine 401k funds with your own funds, you risk it being classified as a distribution which would result in taxable income/penalties.

You can go either approach, as you mentioned, there are added costs with the LLC.
Most CPA's mess up partnership returns where one member is a retirement account.

Lori Lloyd · Answer

This would be for a cash purchase, no loans. It is my understanding that my 401k cannot be more than a 50% owner, but I may be confusing this with rules under LLC structure. In any event, we would go 50/50 on all expenses and profits with unanimous agreement being a requirement. The other partner is a family member (not direct lineal family) so concerns over agreements are not anticipated. Just wondering if the cost of setting up LLC is even necessary or would we run into more headaches and paperwork and tax implications by going the route of TIC? TIC seems to be a simpler setup for a small investment.

Caroline Gerardo · Answer

LLC you can't close conventional GSE loans, you can get private or commercial loans. LLC extra costs for filing, extra taxes, extra bank accounts...You need CPA tax advice mixing your 401k with another person or entity. Keep clean records learn to use Quick-books or some program. Either way make sure you have nitty gritty detailed agreements: operating and exit about who pays for what, who writes checks, what happens when the creek rises and a fire hits, what if you disagree, who has more power. One person should be 51% and the other 49%. Who is the stronger person on paper (income, credit, assets?) that's the 51 person. If you have great insurance and an umbrella policy I suggest you vest in a single living revocable trust that also makes all the ins and outs and the creek situation in the agreement.

LLC or Tenants-in-Common - which is best for 401k funds?

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