What kind of entity should we use to invest in syndications?
We've got a pile of reader comments that we've been meaning to get to with blog posts. We got one about whether someone should consider "opening an LLC for this kind of investment."
(Time for the usual boring reminder: we are not your lawyers. We cannot and do not offer legal, tax, accounting, investing, or any other kind of professional advice. This post is just based on our knowledge and experience and offered for your consideration and entertainment purposes only.)
Rather than giving advice--for the reasons above--let us just tell you what we've done and why.
We created a dead-simple single-member Limited Liability Company (LLC), established it in our home state also for simplicity, and use it to make our syndication investments as a limited partner. Every syndicator we have worked with has made it easy to do so--there's been no problem to invest through the LLC.
Here's our rationale. First, it helps to keep things organized. We have other kinds of investments that we hold in our personal names (stocks, bonds, cash, residential real estate, etc.). We consider these investments in a separate category and like keeping things clean. Second, we are treating the syndication investments in essence as a small business--as though we have a small capital investment company that is holding modest slices of real estate syndications. We are devoting a certain chunk of money to investing in these syndications each year, plowing all the passive cash flow back into the business each year, and reinvesting the proceeds from syndications into new syndication investments when they go "full-cycle." At some point, we may decide to use the proceeds from either the cash flow or the liquidity events for our personal use, but for now we are in "accumulation mode."
We treat the group of the investments held in this LLC as a portfolio. It is mostly in multi-family syndications that are single properties, but we've got a few funds, used a few crowd-funded sites, and strayed as far as a fund for self-storage. A few of our Fundrise funds have other kinds of commercial real estate, including industrial. Yes, the crowdfunding sites we've used (two of them) both have allowed us to invest via our LLC.
We have a separate bank account for the LLC and it has its own tax ID number (or Employer Identification Number) with the US Internal Revenue Service. If you happen to use a single-member LLC, you can treat it as a disregarded entity (which means you don't need to file a separate tax return for the entity). We have this separate account to keep things clean and orderly. It also keeps our CPA happy with us.
There are a few possible counter arguments to this approach. One is that you already have limited liability as an LP, such that you don't really need the extra limitation of liability provided by the LLC. Another counter argument is that you shouldn't put too many investments in a single entity but rather should create an LLC per entity so that if your LLC gets sued, the litigant can't access your other invested funds when they go after you. Some lawyers will set up an elaborate structure with a Wyoming LLC at the top and then other LLC under that holding company. Your lawyer, accountant, and/or insurance agent may have other arguments for you.
Just a reminder that you can send us questions and we're happy to share our thoughts with you on a future blog post!