Starting a company/LLC for passive investment, overkill?

Question

I'm planning to get involved in a few apartment syndications as a passive investor, potentially doing a small apartment myself few years down the road if I learn enough. Is it necessary to form a company or do an LLC if you're just doing passive investment deals? In terms of liability the apartment is held in the syndication's LLC already, but I've heard of ppl who direct their passive income in their own LLC, which are held in a holding company.

Wondering if it helps to build up reputation of the company as well if it is considered to be involved in deals as well. Thanks.

David Thompson · Answer

Tony,

As a limited partner you should have no liability except loss of your investment dollars.  Read the PPM but that is normally what is attractive from the investor's standpoint is limited liability in the partnership.  That said, syndicates take LLCs from an investor who wants to hold the asset in that form and the reason investors use them is that they have an existing LLC from other investments and they just put this syndicate deal in there to protect the holding from lawsuits that might happen to them outside of the syndicate investment.  Rarely do I see someone forming an LLC exclusively for this investment as there are management oversight responsibilities, costs, etc that need to be considered and folks are coming into syndicate deals with a passive overall mentality to start with so burdening them w/a more active company is not something that they are considering.  Always good to discuss with a legal professional involved in asset protection strategies though especially when thinking of your longer term plans.

Christopher Smith · Answer

Whether you operate through a legal entity or not generally has no bearing on the tax deductibility of an item. Its the nature of the expenditure and the reason that its being incurred which determines if and how an item is deductible as an expense for tax purposes.

Christopher Smith · Answer

There are many variables that go into determining whether an entity limiting liability is appropriate in most situations.

The risks to be incurred by you within and without the activity, the assets you own and how you own them, which state you reside in, which state the activities are conducted, estate planning considerstions, costs of entity establishment and administration.

So often there is no quick and ready rule of thumb despite what many novices and folks promoting these entities might indicate.

For example, I own numerous SFRs in various states but mostly California. Setting up an LLC for each property would make little sense because the cost per entity would be prohibitively expensive. Cost to form, cost to maintain and state filing costs would far outweigh the relatively minimal cost I incur for umbrella insurance that more than adequately addresses my potential liability issues. But that's just my fact pastern not necessarily yours.

So sorry there is no easy answer, it's just too fact specific to even begin to give off the cuff recommendations. However it is an important decision so do some research on your own (there are many resources on the internet to educate yourself), or see a competent professional that does not have an obvious vested interest in seeing you set one up.

David Thompson · Answer

Talk to your CPA.  Before forming a LLC, you certainly can have legitimate business investment expenses to offset your personal income.  You don't necessarily need a LLC to do that.

Tony Lin · Answer

Thanks David. If passive investors don't setup a business or LLC, then does that mean they can't deduct the business expenses such as attending education seminars, trips to visit properties, meal etc. on such trips etc. I don't think those investment expenses can be deducted without going through as a business entity.

But thanks everyone for their thoughts. This is great info ahead of me meeting an attorney.

Tony Lin · Answer

I do have a large umbrella setup so should be OK on the liability front. Being a passive investor on syndication deals I don't expect too much liability to come my way. Then LLC would only be needed for anonymous purpose?

Thanks for the help guys. Should I be talking to an attorney or is this something a CPA can handle?

Jay Dean · Answer

The primary purpose of an LLC is to protect your personal wealth outside of the entity.  If you have anything worth protecting, it is well worth the modest investment of time and / or money.

Make sure that in addition to forming the entity you correctly understand how to properly operate within that entity during your day to day work.  It is easy to "pierce the corporate veil".  You can read about that on forums like this or do the wise thing and talk to an Attorney.

Starting a company/LLC for passive investment, overkill?

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