How to structure LLC so it is easy to pay investors

Question

Hi All, I have a question about the best way to follow the rules when partnering with investors and paying them a % of profits. My plan is to partner with investors, buy homes, get them rented and then do quarterly payments of the profit to my investor. What's the best way to structure this since my company that owns the real estate is a single member LLC? Can we just write up a contract that outlines the details of the investor as a profit participant in my single member LLC? Please let me know your thoughts on this.

I have outlined my business plan below.

1. Buy home using investors capital

2. Get home rented

3. Refinance the home and pay investor lump sum of his/her money back

4. Pay % of profit from each quarter to investor

I have outlined my business plan below.

1. Buy home using investors capital

2. Get home rented

3. Refinance the home and pay investor lump sum of his/her money back

4. Pay % of profit from each quarter to investor

David M. · Answer

@Max Rieves

Not being a CPA or lawyer, I'd still go with my basic plan.  Form another LLC/partnership with your investors.  Feel free to use your single member LLC instead of you personally to be represented in this multi-member entity.  Your single member LLC is "running the show" and your investors are putting up the cash into this new entity.  Again, this has the benefit of keeping a clean, separate set of books for this deal, especially if you plan on doing more and with the different set of investors.

If you run everything out of your single member LLC, it will get too messy if anybody gets "upset" even if you keep a separate set of books and bank account.  Everything under the umbrella of your LLC is at risk.  The separate LLC/partnerships isolates each deal, and your single member LLC isolates you from each of the deals.

Since you are working on a refi now, I think its still possible to form.  The property would just be part of the capitalization of the new LLC/partnership -- again, talk to an attorney to see how it works for your circumstances.

Partnerships are made all the time when you have multiple investors.  A good partnership agreement will keep everything square.

Hope this helps.

David M. · Answer

@Max Rieves

Little confused...  which entity is buying the property?  You are using investor capital but then paying it all back after refi? Is this before or after the fact?  Hmmm..

How about forming a Multi member LLC with your single member LLC as a member and your investors (as whatever entity or entities they choose) as the other members.  Your operating agreement would spell out your business plan.  Then everybody gets paid via the k1 distribution.

I am guess LLC formation and maintenance not much difference than creating a partnership or proving some sort interest/dividend payment.  Plus, if you create a multi member LLC for each buy and hold deal, each deal is separated from the other and has its own set of books, bank account, etc.  if a dispute arises you wouldn’t want everything to be under your sole single member LLC.

Just my two cents...

Basit Siddiqi · Answer

@Max RievesIt doesn't sound like a single member LLC if you have other members who are investing capital.Regarding multi-member LLC's, you want to keep track of everyone's basis, which includes contribution, share of profits/losses and distribution.You may also have a requirement of issuing a K-1 to each investor.

Max Rieves · Answer

@David M. Thanks for the response! Here is how it goes: 1. Investor wires my LLC bank account money. 2. I use that to buy homes to rent. 3 I get it rented and refi in a few months. 4. When we refi I pay back 80% of the cash we used to buy the home and leave 20% In the deal. I then will pay a % of profits to the investor at the end of each quarter. Aiming to get a 7-10% return on the cash left In the deal after refi.

Real life example:

bought home for 190k

Got rented for 1695

Working to refi now and it will appraise around 200-210k

Pay investor roughly $160k back, leaving 30k in deal

This deal will cash flow around $500/month

Leaving money for me and the investor to both be happy with.

The question is what’s the best way to structure this? I currently have a single member LLC

Max Rieves · Answer

@Lance Lvovsky thanks for the reply. I am going to DM you

Lance Lvovsky · Answer

You own 100% of the capital and profits interest but want to give a percentage out to an investor? Can't be a single member LLC as you will need to report on a K-1 to an investor with a capital and/or profits interest.

Might be easiest to structure as an interest payment where you pay x% of quarterly profits to your investor, but your investor is not an equity investor, rather they are loaning you money. I suggest to speak to a CPA and attorney before proceeding.

How to structure LLC so it is easy to pay investors

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