Residing in CA, LLC in WY, Syndication in TX - Challenges?

Question

I'm a resident of CA and I plan to invest in a syndication in Texas along with a friend of mine. I talked to a few lawyers and the recommendation was to create an LLC in WY with both of us as members and invest in the syndication through the LLC. A few questions though.

1. Once I register the LLC, how do I get a WY address to create a business bank account? Neither of us reside in WY or TX.

2. It seems like I would still have to pay the $800 annual fee to CA for the LLC as long as I reside in CA even if the LLC is incorporated out of state and holds investments outside CA. Is there a way to circumvent this?

3. I'm told the syndication would generate a K1 for our LLC and then the LLC would have to generate two separate K1s for each of the members. Is this a straightforward process?

Thanks,

Jay

Spencer Hilligoss · Answer

@Jay Pragasam Hi Jay - i’m a Californian syndication investor. Have invested as both LP and GP on multiple TX deals, across multiple sponsors.

Plenty of passive investors don’t use an LLC for investing as a limited partner. If you are investing with a partner, that’s one of the only valid reasons that i’ve seen my fellow Californians setup an LLC for investing as LPs in syndications.

In regards to the $800 fee: if you live and invest from California, and you create an LLC… you are not going to get around the fee. California goes out of its way to ensure you pay that fee.

I don’t think there’s a valid need to create a business bank account in WY, personally.

Reminder: sometimes syndication investors make the mistake of thinking that they can combine assets or income under an LLC to qualify for Accreditation status, but that’s not how it works. Each of you will individually have to qualify as accredited if you plan to invest in Accreditation required deals (like a 506c).

Disclaimer: don’t take this as tax or legal advice. Make sure to talk to your CPA about implications on taxes.

AJ Singh · Answer

@Ronald Rohde

Thanks for the insight. i Stand corrected

Taylor L. · Answer

I've found many passive investors who use their own entities do so primarily for privacy reasons. They'd rather not have their own name on any of the Operating or Syndication docs, so they create an LLC to do the investing for them. That tends to be higher net worth/higher income investors like doctors.

AJ Singh · Answer

@Jay Pragasam

To be honest, I don’t understand why a LLC is necessary since your skin in the project is limited to your investment as a limited partner

There is no collateral for your investment  anyway as compared to single family investing

There are syndicators whose minimum investment is $25k to $50k but may be open to accredited investors only .

All I can say is get yourself educated to that extent as if u are the asset manager before committing a dime. Also I have heard on various podcasts to vet the sponsor and. Make sure sponsors have completed  deals full cycle

When a syndication goes south and it does happen, general partners have made their share of fees ( acquisition and asset mgt) , loan are non recourse and their investments may be less impacted than a limited partner who is depending on pref return and share of funds from waterfall either refinance or sale

Jon Schwartz · Answer

Jay,

This is really complicated, and there's no reason for it.

If you and your friend are investing in the syndication as limited partners, you already have limited liability in the investment. That means that your liability does not extend any further than the capital you invest. At worst, you'll lose all of your money, but nobody can come after your home or other assets. If you're creating the WY LCC for asset protection, you're creating it needlessly.

And why are you and your friend forming an entity to invest together? Is it because there's a minimum investment amount? Don't worry; syndicators will take money from anybody who qualifies! Just explain that you two are investing together or not at all. Is there some other reason?

Best,

Jon

AJ Singh · Answer

@Jay Pragasam

You will also have to file annual tax returns for LLC as well. Since syndication is in Texas, a state return will be necessary.

Being a Ca resident, we have to pay tax on income generated anywhere.

i am sure syndicator will accept lower amounts to meet the minimum. Hopefully you dont have to structure a new LLC.

the k1 depreciation will only wash away the annual pref return unless you are classified as a real estate professional. The unclaimed losses will come into play once the syndication finishes the cycle upon sale usually

Ronald Rohde · Answer

Good luck!

Jay P. · Answer

Thank you all for your inputs. It is clear that being a resident of CA, there isn't too much of an advantage in setting up an LLC outside of CA.

I reached out the syndicator as suggested and they quickly obliged to our request to invest individually. I'm going to invest as a LP directly into the syndicator's LLC.

Ronald Rohde · Answer

I didn't see a TX entity being formed, was there? A TX return is just a 15 minute online Franchise Tax Return, if you're below $1.1 million in gross receipts theres no tax. Just your time and energy.

Without seeing and discussing more, I think the lawyers you talked to should really have the advice which should be followed.

Jaspreet Baveja · Answer

Hey @Jay Pragasam, you've got some great input and insights from experience LPs and GPs in this thread, but thought I'd chime in as well, being a CA based LP in many deals out of state. I only ever invest as a LP in my personal name, qualify as an Accredited Investor (AI) on my own, but if I had to partner up:

1) I would highly recommend researching setting up a LP (Limited Partnership) or LLP (Limited Liability Partnership) as the entity that would invest in the syndication. - pay the same $800 fee but have possibly less paperwork to manage?

2) As everyone else said, approach the syndication operator and as long as you both individually qualify as an AI, invest separately to meet the min requirement.

Best of luck sir! I don't see the need for the whole WY route at all!