Passive Co-GP|As an Individual or LLC| Recommendations & Reasons

[Gaurav A.]

Exploring to participate in real estate multifamily deal as a Passive Co-GP.  Co-GP who would not have any voting rights or management decision authority. The Co-GP will only bring in capital to participate. 

Should the Co-GP participate as an LLC or Individual?
Why as an LLC? 
Why as an Individual is okay and not okay in this specific scenario (Passive Co-GP)? 

Feel free to ask if other details are required. 

[Arn Cenedella]

@Gaurav A.

One caution:

Per SEC regulations - which are constantly under review and or changing - co-GPs must do more than raise or bring capital. The general guidance is co-GPs should participate in the acquisition and or ongoing management of the asset. This could be providing earnest money deposit, helping with the market analysis and or underwriting, helping with management, financial accounting reporting and documentation, and investor relations. Failure to participate in GP management activities while just raising capital (probably) violates SEC regs. Consult a knowledge legal professional of course. 

So while the notion of not participating may provide a false sense of security on the liability front, it runs smack into a SEC reg violation.

To address your specific question, let me say my thinking runs counter to conventional wisdom in regards to liability protection provided through the use of LLCs. While LLCs are often promoted as bullet proof asset protection devices, I don't quite feel they are quite as good as advertised. LLCs can be pierced and if there is transfer of money between the LLC and the individual that may further weaken the LLC protection. My bias hereby acknowledged. I know many will disagree. Consult proper legal professionalisms to obtain their counsel. Just expressing my personal view.

All that being said, syndications often have at least two LLCs - #1 the ownership entity 123 Main St LLC which is managed by the general partnership which is generally the 2nd LLC 123 Main St Management LLC. The GPS including co-GPs are members and or managers of this 2nd LLC.

So whether one enters the GP LLC (the second LLC) as an individual or as another LLC, the second LLC provides protection to the GPs and co-GPs. In addition I often believe there is some language in all the docs wherein the ownership LLC protects (indemnifies?) the GP LLC.

So in my mind to answer your original question, it doesn’t really matter.

The best lability protection in my opinion is just “do the right thing” by your investors. If one makes a mistake, own up to it, rectify it and move on.

Caveat: Consult proper legal counsel for specific advice as it pertains to your plans.

My intent here is simply to provide some general basic understanding and at least provide a road map as to what questions to ask and what issues to explore.