LLCs, partnerships, corporations, sole proprietors,
what's the rights that type of entity for your syndication, or
fund? Today we're gonna do a video that's a blast from the
past, it's a couple years old, but it's still very relevant and
very valid and up to date information. So it is a
discussion about how you would choose your entity type. And
that entity type that would fit for your syndication or fun, I
hope you find it useful.
We are going through the course specifically, we're talking
about company and even more specifically, we are going
through foundation. So today segment we are discussing entity
type, and what type of entity should you be forming? So you've
heard lots of different things about corporations LLCs,
everybody's got an opinion DBS. So we're going to go through
what each of those look like. And then we're going to talk
about how exactly you choose what makes the most sense for
you. Give me a little bit of advice and feedback on what the
next steps are and who you'd want to talk to, to really firm
up that decision. And then and then you're going to have a
pretty good guidance on how to do it. And then ultimately,
you'll make a decision on on what it's going to look like.
Now, these types feed back into your structure. So each of those
entity types, that management entity that you're going to
form, it might be an LLC, it might be a corporation, the the
buildings themselves, they might be LLCs, they might be
corporations, you might even want to do them as DBAs, though
I doubt that that you would actually want that. So let's
talk about those different types that there are. So start us off,
we've got kind of the simplest, we've got DBAs. So the DBA
stands for doing business as these are normally filed in your
local city, or your local municipality. Basically, it just
lets them know that there's a fictitious name that you're
going to be using, and associated with business. This
is everything from your sole proprietor, it could be a
partnership, but DBAs are or this type. The other type is, is
partnerships themselves. Again, that gets filed, typically it
gets filed at the local level to get a name associated. But this
really depends on your particular state. So in
California, if you're going to have a general general
partnership, you actually don't need to file anything with the
state. Not all states follow that sort of methods, some do
require that you file partnership agreements with
them. So you need to check on what your local rules are, if
you decide ultimately that a partnership oops, makes the most
sense for what you're going to be doing. The next type is an
LLC, LLC stands for limited liability corporation. These
have been around since the 1970s. It was an alternative
that came out of smaller companies not happy with all the
requirements in order to act as that corporations were being
held to. So they are a little bit simpler. And they have some
different nuances with those as well. Lastly, we have
corporations. So you a corporation is its own entity as
well. It gets filed with your state. And it is a it's a very
common mechanism. You've I'm sure you've heard of them. So
you may be asking yourself, Well, why didn't I write S corp
or C Corp here. So S corp and C Corp are actually PACs, ways of
filing taxes, they have tax implications. They don't have
actual implications as it relates to an actual property
itself. So you may be surprised to learn that an LLC can be an S
corp, or it can be treated as a partnership. It's really up to
you and how you choose to do that basically whether or not
you make an S corp election with the IRS. So that's why we didn't
do those. We will be talking a little bit about tax strategy,
but not a lot in this because really the best one to answer
that. It gets really specific for what your own particular
needs are. And so for that probably you'll want to talk
with the accountant that you've already identified or will
identify as part of your team. We'll be talking about teams in
a later on segment as well. So these are the four main types of
entities that we're going to go through. So the first question
that we ask ourselves is, how many owners can there be. So
this will kind of rule some things out for you, sometimes it
won't. So DBA is one person. So it's always one person, that's
who it is, it's a sole proprietor acting as one person,
a partnership always requires two or more people in order to
be a partnership, you can't be a partner alone. So it's two or
more. And you actually can be, have one person as an LLC, or as
a corporation. So so if you have more than one person, that kind
of rules out DBAs, but all the others are on the table. So now
let's talk about asset protection. Oops.
So asset protection is very important. So there are there
are two kinds of asset protection that we like to talk
about, we have what's called inside out and outside in. So
let's write that down. Inside Out.
So inside out asset protection is the is the protection that
you would have, as an individual, as the manager, or
the main executive, inside of the company, to protect you from
outside from the outside. So it would be, you'd need to make
changes to the outside. So say you have a huge amount of debt,
whether or not you'd be able to be relieved that liability is
what we would considered outside, inside out asset
protection. And outside in is the opposite of that. So it is
say there's a lawsuit taking place, and somebody is suing the
LLC, or the corporation or whoever, whether or not that
protects you from liability against them. So as far as DBAs,
there is no asset protection whatsoever. It doesn't exist. In
terms of partnerships, this is where it gets a little bit more
tricky. So we have two kinds of partners. We have general
partners, and we have limited partners, the general partner is
the one who makes all the decisions, who does all the
work. And the limited partner is the person who mostly just
invested the money and just sits back and lets the general
partner do the work. So as far as asset protection goes for the
the limited partner, it is good asset protection, but there is
no asset protection for general partners at all. Now for the
LLC, we have an LLC is good. For Inside Out. It's good for
protecting against that. And it's probably less good. But
it's not as well tested, but it's probably somewhat less
good. About for outside in. And we can get into much more detail
about this in a consultation, then we're starting to talk
about charging orders and things like that, and different kinds
of LLCs in different states and how those affect for this
purpose. It's pretty good. And I wouldn't rule out asset
protection for an LLC, I wouldn't base asset protection,
like getting rid of an LLC, just because of that. For
corporations, corporations are good for Inside Out liability.
It's very easy to just file just basic BK or bankruptcy a
corporation and the debts of that corporation go away. It is
bad for outside in as long as it is a closely held corporation.
So if if you are the only person in the corporation or it's
extremely small, but really you're doing all the work, you
really aren't going to have very great outside in protection. So
you probably are going to get the most amount of asset
protection from the LLC. In terms of governance and
management And, you know, this is what we're talking about here
is how easy is it to get through all the paperwork and, and
comply with all the legal formalities. For DBA, it's easy,
there's very, very, very little, maybe you need to update
something every year or every few years, with your local
municipality. And that's it. With a partnership, it's also
pretty easy, it varies state by state exactly what needs to be
done. So we'll just put pretty easy. And then in terms of an
LLC, it can be easy to complex. This is where it comes down to
whether the LLC is member managed, or, or, or managed or
managed. So a manager managed LLC is where the manager makes
all of the decisions. So if you or your entity is the manager of
the managed LLC, you're the one making all the decisions and you
just take to your investors as to a vote as necessary, as
required by your operating agreement. In general, the it's
pretty easy to keep them up to date, keep them things going, it
really becomes down to what your your operating agreement says.
And unless there's some sort of specific rules of your state in
order to comply, so many states, they don't require a board of
directors, they don't even necessarily require any
executive officers. And so that can be pretty simple. Whereas a
corporation is almost always complex, you typically need a
board of directors and officers. Now in terms of maintenance
costs, that's going to be very specific on your individual
states. So you really, you could draw out and find out through
your local state, what the costs are going to be for each of
these. And then you've got your multi state issues like say you
have, you know, everybody thinks, Well, you file a
corporation in Delaware, that isn't always the case. If I file
a corporation in Delaware, and I'm doing business here in
California, I still have to file with the state of California, I
still have to pay my taxes with the state of California. And,
and I have to let the California know that this foreign
corporation this Delaware corporation is doing business in
its state. And it's because of that rule, we're not going to go
into choosing jurisdictions beyond the easiest way to choose
a jurisdiction is to just put it wherever your company is, there
is nuance in there. And there may be reasons why choosing a
different jurisdiction would be better. But that's outside of
the bounds of this discussion. So once you've got the your,
your kind of this matrix in mind, the next thing to think
about is how to make the decision on what to file us. So
here, I would really start thinking about the entity that
you're going to be doing. So let's start with the managers
entity right now. So what's most important out of this to your to
your actually, one more, let's put one more topic here, because
this can be important too. So let's put record keeping as
well. Record keeping for DBA is extremely easy. I would say most
of the time, it's easy to do a partnership, it's pretty darn
easy to do a LLC, but we'll put moderate just to differentiate
it from easy. And by that I mean, you're going to have to
file a Statement of Information probably every year with with
the state. But it's very simple. It's a one page form almost
everywhere. So it's pretty simple to do. Now for a
corporation, it's much more complex. You need to file you
need to have minutes of regular scheduled board meetings. To
make and spell. You still need to do the statement oops, the
Statement of Information. And you need to have records of any
sort of decision make decisions that take place. Now if you
don't do that your corporation could very easily be determined
by court as not being a legitimate Corporation, and
you'd get get rid of any sort of asset protection that you had
from the very beginning anyway, that's why it's very important
to comply with the record keeping rules. Now, when it
comes time to make a decision about what you want to what kind
of entity you think you need to form. I don't think there's, I
don't think there any attorney would ever recommend anybody do
something as a sole proprietor, or even as a partnership for
something like this. A, perhaps there are good times for sole
proprietor for a partnership, especially when you need
extremely low overhead, you need to be very easy, and you want
taxes to be very easy. That's pretty much how we'd make the
decision here. But this is just generally not going to be the
best choice for you to do a DBA or partnership. Now an LLC
versus a corporation, it really comes down to a few things. And
what I think most way I would think about it is how easy do I
want my governance? And how easy do I want my record keeping, I'm
getting about the same amount of assets, about the same amount of
asset protection a little bit more with an LLC. So it's
actually got a really great structure for me. And last.
The only exception would be if I really am going to be using this
kind of structure anyway, for a board and for officers. Or maybe
it's, it's something that your investors would rather see
because they're more familiar with corporations as well. So
almost always for the property itself. You're going to use a an
LLC, because there's so much easier to put together. And the
paperwork is so much less that it's it's just generally easier.
In terms of a corporation. In less if, again, my my thoughts
would be well, if you wanted to do put together a C Corp,
because that's what your investors were used to. And
that's what they were requiring. Now, C Corp is a type of taxable
entity. So it would be a corporation but filed with the
IRS that you would be taxed as a C Corp. And it has different tax
rates, it has different opportunities for deductions.
LLCs and s corpse have an opportunity for 199 A deduction.
And your accountant can walk you through that if that's
appropriate for you. They also can walk you through whether or
not it makes sense because corporations in general are not
subject to self employment tax most of the time. So it really
would be come down to what do I if I need to file a C Corp as a
C Corp, I'm going to have to do it as a corporation, I'm not
going to have that availability in an LLC. And really, what kind
of level am I putting it into? And is this something that I
want to really make something easy for me to do and be able to
trade and move people in and out of, for real longevity, I'm
probably going to choose a corporation, because it's just
better set up for that sort of thing. But if this is something
where I'm going to just manage it, I'm not quite sure the long
term future of it, whether it's just going to be five years or
whatnot, I might very well choose an LLC. So this, so I
would go through and rank those and just kind of decide, well,
this is important to me, this is important to me, this is
important to me make that decision, and that's your
decision, you're gonna have it's quite easy to do different
entity types for different types of entities. So your properties
will will almost always be LLCs. But perhaps your your management
company will be a corporation, and that's totally okay. So go
through that, think about that make a decision. And the next
step then really is to get that filed. And so I would file that
your management entity sooner rather than later. That's what
you're going to be building your name and reputation under. So
that's really the first decision you've got to make. And when you
do that you have a limited time to make an S corp election. So
talk to your accountant, either as you're doing it or very close
in time to when you're doing it, to see to get their input on
whether it makes more sense for you to be taxed as a partnership
or taxed as a escort. I hope that has been helpful make those
decisions, write it down, and we will see you in the next
session. I hope you found have video helpful while LLCs are
probably the most likely candidate for what syndication
structure or fund structure you're going to use. As you can
see, it's not the only choice. If we can help you choose a
break kind of entity for you and make your syndication or fund
journey better, please give us a call. My name is Tilden
Moschetti. I am a syndication attorney with the Moschetti
Syndication Law Group.