Should Investments Made in To Syndications/Funds be held in LLCs

Question

Hello All,

Most of our portfolio is in single family homes. We are trying to diversify and have been looking in to syndications and Red D funds. I believe the syndications would be standard multi family and industrial investments that provide a K-1. The Reg D fund is an unsecured fund where a turnkey provider is using funds to purchase more homes for investors. In this case there is no K-1 and instead there is just a 1099 issued at year end.

I wonder if we could trouble you all for a bit of knowledge:

1. Is there any liability risk associated with these and consequently should we go to the trouble of holding these investments in a or multiple LLCs?

2. If so do you have to have an LLC in the state where the syndicator resides.

3. If I live in Texas and invest in a California syndication to I have to file a California tax return?

Thanks in advance for your help - I apologize if these questions are rudimentary,

Taylor L. · Answer

Passive investors' liability is limited to their original investment in typical syndications. Your credit and name aren't on the line (unless you agree to sign on the loan). Here's a great article that addresses this from @Kim Lisa Taylor

The main benefit that I've seen folks go for by using LLCs to invest passively is the additional layer of privacy that doing so can offer, if properly structured. If the offering is a typical 506(b) or (c) I would not expect the LLC's state to be a factor in whether or not it can invest, unless for one reason or another the sponsor has decided not to accept investments from particular states.

Regarding state taxation I will let a CPA or other competent tax pro weigh in on the specifics. It is good that you're thinking about that.

Jeffrey Donis · Answer

@Brandon Riahi As @Taylor L. said, passive investors do have risk in an apartment syndication. However, they can only lose what they put in. Therefore, you shouldn't invest any more than you're willing to lose.

However, it should be noted that the loan guarantor (usually on the general partnership team) has the most risk, because they are signing off on the loan from the lender.

No, an LLC is not required.

I would consult a CPA regarding taxes.

Hope that helps! Good luck!

Mike S. · Answer

@Brandon Riahi

Don’t forget that getting investment in LLC is to protect you from two risks: inside and outside liability.

Inside liability risk in syndication is usually non existent as in most of them you will be a limited partner or an LLC member. So you are already protected there.

However, if you are sued personally for something happening in your life (car crash, …) a judgement can take all your investment away. Having an LLC in a charging order protection state will protect you against losing your investment. Some syndication structure may be in a charging order state and have strong asset protection operating agreements, but most don’t. So it is nice to have a holding LLC that you control to protect you.

Last but not least, I prefer to have a partnership holding LLC to consolidate all my Syndication K1 into one. It makes my life easier when borrowing as every lender is asking for my tax return and are asking way too much question about all the different income and K1. Now I have just a w2 and one K1. It declutters my tax return and make it much easier for underwriting. I have to file a 1065 return for my partnership but it is a small price to pay.

Benjamin Aaker · Answer

You don't need to form an LLC just to invest but I'd recommend doing so. Your liability shouldn't change because it is limited to your investment as @Taylor L. has stated. The LLC helps you keep anonymity and helps you keep track at tax time, assuming you are making multiple investments from the same corporation. When you fill out the subscription agreement for a syndication you will have to give your SSN if in your name or EIN if in your LLC. I'd rather not give out my SSN whenever possible. Also, you may not want other investors to know that you personally are involved in the deal. The LLC helps alleviate this.

For questions 2 and 3, You'll need to check the state where the property is located to determine.

Basit Siddiqi · Answer

@Brandon RiahiThis is a conversation that you should have with an attorney.However, most syndications are already set up as an LLC or an LP where you will be a non-managing member or Limited Partner. As such, your investment will only be risked up to your capital contribution.You normally will not increase your risk unless you guarantee a note or increase your responsibilities to that of a managing member or general partner.Creating an extra LLC may provide some 'anonymity"

Chris Levarek · Answer

@Brandon Riahi I'm not a CPA first and foremost, definitely a questions to ask. However having done a few of these by now, I can offer my input based on my experience managing 4 syndications and 2 funds.

• I do not see a LLC being needed for liability protection. Most are used for anonymity when investing into syndications or for simple organization purposes, partnerships, etc.
• You do not need a LLC where the syndicator resides. We have LLC investors from many states.
• This one, definitely ask your CPA. Normally, when you get issued the K-1 from the fund , you would be given a K-1 per state the fund is investing into. So if the fund invests into ohio and california, you would get a k-1 for both, regardless if you are only in one investment in California. You would only be affected by the state with the property you are invested in with the fund however. Typically, you will be required to file state tax returns IF the state has a state income tax, some don't(Texas and Florida) for example. Being as you are getting a 1099 however(unfamiliar with this setup at present), it probably follows the same process.

With that being said, I'd be interested in seeing this fund setup. If you can share, I'd appreciate it. Sounds like a debt fund versus an equity fund, which are the more traditional method but be interested in seeing how it is structured. My email is in the signature or just dm if you feel like sharing :) Thanks!

Spencer Gray · Answer

Also not legal/financial advice

Let me just say this - I do invest through an LLC when I invest as an LP.  I also have attorney's who invest in my syndications who invest as individuals, not through an entity or trust.

Mike S. · Answer

If your LLC is a single member owned by you, you WILL have to give your SSN to the syndicator as for tax purposes, on a W9, you should not put the EIN of the LLC but the SSN of the owner.

Evan Polaski · Answer

@Brandon Riahi, I will echo most of the others, but primarily Mike's comment about inside and outside risks.  I have some physician friends, for instance, that invest through their LLCs to protect against claims in a malpractice suit.

And even with LLCs, in the event of a lawsuit, attorneys will make every effort to pierce the corporate veil.  A document that you accidentally sign personally, and not as a member of an LLC, a personal social media post, etc, can all be grounds to move to you anyways.

Again, this is for outside protections, as a reputable syndicator will be moving all docs through their attorneys to make sure signature blocks are properly kept.

Lastly, regarding finding good syndicators, I would encourage you to network and talk to as many people as possible.  There are a lot of good syndicators here on BP and around the podcast circuit, but this is just one sphere of influence.  There are groups that have track records dating back to the 80s and 90s, with billions of assets under management, but never market themselves.

Taylor L. · Answer

Look for syndication teams with experience first and foremost! No need to be someone's first investor.

Should Investments Made in To Syndications/Funds be held in LLCs

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