Rental Property Investor · Member since 2020 · 36 posts · 18 votes
Hi - I invest in small (2-4) multi-families with a friend through a LLC partnership. He is on a work visa so he can only be a passive member and I am the managing member. We both put 50% each of down-payments + closing costs and both get 50% in equity. Our properties have ranged from $100 - $200k.
Am I violating SEC regulations because he is fully passive and puts in 50% capital?
Also if I add another passive member to the LLC, would the answer to above change?
One common confusion I see is the difference between what each member is allowed to do versus what member actually does. For example, take a five-member LLC with one member acting as the manager. Depending on what the operating agreement says, the manager may have most of the day-to-day powers. And as a practical the matter, it might be the case that the four other members just want the manager/member to do everything.
But the fact that the other members are generally not involved in the day-to-day operation doesn't mean that it's automatically a security. This is especially if the members have powers that can counterbalance the powers of the manager. For example, the operating agreement could state that certain important decision requires majority or even super majority votes from the members.
It's a complicated topic. My advice is to hire a lawyer to review your situation and draft an operating agreement that could most likely stand up to SEC scrutiny.
Disclaimer: While I’m an attorney licensed to practice in PA, I’m not your attorney. What I wrote above does not create an attorney/client relationship between us. I wrote the above for informational purposes. Do not rely on it for legal advice. Always consult with your attorney before you rely on the above information.