Does it make sense to have a separate bank account for one's syndication investments?
Another good reader question from our mail bag: how about bank accounts? Put another way, does it make sense to keep one's syndication investments separate from one's other finances?
This is one with that old annoying answer of "it depends."
One answer: for our family, we have chosen to set up a separate company (LLC) with its own tax ID number at the IRS and its own business bank account. That's because we want to think of our syndication investing as a "business." So far, we have plowed cash into the business and taken none out. Even though there has been cash flow that could be meaningful to our lives, we've just kept it in the business checking account for the company. We have used that business checking account to make new investments as well, so effectively our passive income from syndications is now compounding since it is heading into new investments that in turn send us new passive income. Rinse and repeat.
Come tax time, this structure keeps things quite simple. We just turn over an Excel spreadsheet with the transactions from the company's single bank account to the family CPA, along with starting and ending balances. We treat it as a single member LLC with the single member being an accredited investor, so the entity is therefore considered accredited--essential for access to certain deals. As a single member LLC, the entity is "disregarded" for tax purposes so we do not file a separate return for the entity. It's all just worked into our family's tax return.
The flip side: it does not need to be that complicated. You can simply invest in your own name. You can fund directly from your personal bank account as you would if you were buying stocks or bonds. And you can have the cash flow direct-deposited into your personal checking account like any other income you might have. There's really no reason not to do so, especially if you have just one or a few such investments. It's probably not worth the hassle of establishing the LLC, establishing the bank account, maintaining registration for the LLC, working with your CPA and family lawyer, and so forth if you're making, say, a single $100,000 investment in a multifamily apartment building syndication.
At any time, you can make it more complex if you like. There's little downside we could imagine of getting started in the simple manner, seeing if you like this type of investing, and moving to a company structure if you go further over time.
So, it depends. Of all the questions you have to consider with syndication investing, the choice of whether to set up a separate bank account is probably one of the easier and least important.
Keep those questions coming! Thank you for reading and engaging with us.