Reading the balance sheet of your LLC investment. Guide to Limited Members

[Bruce D. Kowal]

We noted that Members of LLC's have the statutory right, under State LLC law, to get copies of tax returns and financial statements. We referred to Colorado, as an example. Here are the similar provisions for New York State.

New York State LLC Law §1102

Go to this link, the IRS Form 1065. Scroll down to page 6, Schedule L, Balance Sheet per Books.

https://www.irs.gov/pub/irs-pdf/f1065.pdf

Now that you have obtained a copy of the LLC tax return, in accordance with your rights, let’s focus on two elements of the balance sheet: Line 1 Cash, and Line 13 Other Assets.

[The BIG number you want to look at would be on line 7a and 19a - Loans to and from Partners and Related Parties. Another post!]

[1] Line 1 Cash. Does this LLC have any cash? Simple question, right? I have seen tax returns where the cash is not stated. The Managing Member may respond that the cash is held "in escrow" by their Attorney. Now, go away and don't ask any more questions . . .

You have a right to ask for a copy of the year-end bank statement. December 31, 2024. The ending balance should agree with what is on the tax return. Period. If you are told that the cash is held by the attorneys in escrow, ask the attorneys to verify, and mumble something about IOLTA, and whether interest is being paid. In any event, there is commingling going on, which is not good. [If you ever want to see an Attorney sweat, tell him that you think there is an IOLTA violation]

[2] Line 13 Other Assets. Look for the components of this. What are you looking for? Syndication Costs. The money spent on forming the LLC and, importantly, the commissions paid to salesmen to sell the LLC. Those commissions are usually ten percent, and should be disclosed in the selling documents. Thus, if the LLC raises $3M, you would expect to see $300k in commissions.

Why are we looking for this? Syndication Costs, by tax law, IRC §709, must be shown as an asset, and cannot be written off in any way. No amortization. This means it can’t be expensed, which increases losses [which is favorable]. So, the Managing Member, by not showing this on the balance sheet is NOT following the law. And the CPA who prepared the return is, uhhh, acting unprofessionally. Secondly, perhaps commissions in excess of what is disclosed in the selling documents, are paid. Who wants to disclose that number?

Simply put, Syndication Costs are the amount of sales proceeds [the money raised in the Offering Memorandum] which are NOT being invested in property acquisition.

So, while this is often overlooked to a reader of financial statements, for those of us who actually prepare these returns, it’s a telling sign of the integrity of the Managing Member. Non-amortizable. Includes sales commissions, securities registration fees, costs of marketing the interests, broker fees for selling interests, sales literature printing. IRC §709(a), Regs.§1.709-2(b), Regs. §1.709-2(c).

This is "Inside Baseball".

[Disclaimer: This information is a service to Clients and other readers for educational purposes only. Nothing in this post should be construed as, or relied upon, as legal advice or as creating a CPA-client relationship.]