20 years ago, almost all syndications and investment
funds used limited partnerships. Instead of limited liability
companies that has changed the landscape is different. Now, the
vast majority of them use Limited Liability Companies
instead of limited partnerships. So what makes the most sense for
you for your syndication for your investment fund, I'm gonna
give you some thoughts about what the advantages are, what
the differences are, and then you can decide for yourself what
you think might be the best pick for your syndication or
investment.
My name is Tilden Moschetti. I am a syndication attorney with
the Moschetti Syndication Law Group. We specialize in putting
investment funds syndications together for syndicators,
investment fund managers, help them make sure that they are
successful. And it's part of that what we do is spend a lot
of time on the structure, not only on how to split, how
distributions happen, and how all the rights and things like
that, but even from the very top level, what's that entity
structure look like? And one of the key things that's often
asked at the very beginning of an engagement is, Well, should
we do it as a limited liability company? Or should we be a
limited partnership? Now, there are some differences, some major
fundamental differences, and they might not be the ones that
you would think. So the first main difference between the two
comes down to taxation. Now, you might think that the taxation is
the same, right? They're both taxed as partnerships. Well, in
liability, limited liability companies have the option of to
be taxed as a corporation, but most of the time, you don't do
that. Right. So they're the same thing? Well, actually, no, they
are still different. So the tax, the IRS treats partnerships,
different still based on whether it's an LLC or a limited a
limited partnership. And the reason is that nuance, they're a
little bit different, there are actually two different kinds of
people there do different kinds of entities. So for example, an
LLC has straight pass through taxes, it's very clear cut, you
get your K ones, it's all spelled out there. On the
partnership return for a limited partnership, it can be different
general partners are treated a little differently than limited
partners. Now, this has advantages, some limited
partnerships are set up to pass specific credits through that
can only go to limited partners, but the general partner itself
and that's you the sponsor, right. So may have to claim
income and may not get some of the depreciation benefits,
because it's the general partner and not the limited partner. So
it may not be as efficient as a tax vehicle for, for you as a
sponsor, it'll certainly be more beneficial for the for your
limited partner, but not necessarily for you. The second
difference is management. So LLCs are incredibly flexible, we
can tool them and change them and move them around to really
be a construct a whole structure of what makes the most sense for
your syndication or the fun. Limited Partnerships have much
less, the general partner is in complete control. That's it end
of story that may not fit with what some investors need in
order to come in. And that's why we've I why I think we've seen
the shift from limited partnerships to just to limited
liability companies over the past 20 years. The third change,
and this is also very important for you as a sponsor is
liability protection, you might think because it's called
limited partnership that you have liability protection as a
general partner yet don't, there is no liability protection for
general partners of a limited partnership, they will have that
as part of limited liability company, but you don't as a
limited partnership. So a lot of times, you may go into thinking
that you want to be a limit an LP structure, but then you
realize that now you've got this huge amount of exposure, and we
have to build out some additional walls in order to
protect you and your assets. So some of the advantages of an LLC
are this. So you get the flexibility in the structure,
like I talked about, we can make it look like however you want it
to look like you've got the straight pass through taxation
that makes it very clear that all taxes just get passed
through to the individual partners themselves whether
they're taking on a more LP role or a GP role. It doesn't matter.
It all passes through, there's this asset protection of the GP
of the person in charge of you, the sponsor is there as part of
a limited liability company. Now, we still take the extra
step of building in a sponsorship entity, as you've
seen in my other videos, to make sure that that protection is
there very, very strongly for you. But it's very clearly
delineated. But also, the advantage is, it's a clear
distinction between your business assets are the assets
of the LLC, are very different than the assets of you
personally, as a person, you don't have that same level in a
limited partnership, if you're the GP. And the lastly of the
advantages of an LLC is that ease of formation and
maintenance, they're just plain simpler. The laws of LLCs are
very, very similar across all of the states, the only thing that
changes are very subtle nuances between what's there and what
what's necessary and things like that. But there, it's it's very
straightforward about how those are done. Limited Partnerships
doesn't have that advantage there, to me much more complex.
And the structure itself is like is like building a giant tower
that may tend to wobble a little bit, especially when we take
into account the nuances of local state laws. But there are
advantages to a limited partnership. Like I said, there
are specific tax savings that are only available to limited
partnership organizations, so that those flow through the the
taxes that are there, for example, there's some like an
asset, some equipment, depreciation, things like that
are only available through limited partnerships. And so if
that's a key component of the structure itself of your
syndication or fun, you might choose to do a limited
partnership. And the second reason that you might do a
limited partnership is there definitely is a very clear
delineation of these people are limited partners. This person is
the general partner, which gives you the sense of okay, well,
that means I really am the only decision maker in this reality
is though, we can change that in an LLC operating agreement to
give you the sponsor still essentially the same amount of
control and rights that you would have in a limited
partnership with just a very small amount of weakness, right,
the amount of risk that's created by that weakness, in my
opinion, generally, and this may not apply to your specific
situation. So talk to your attorney before proceeding is
that the nuance isn't worth the difference in going to the
limited partnership versus a limited liability company. At
the end of the day, almost always I recommend people doing
a limited liability company. There's only specific nuances
which may or may not apply to you and to your particular
situation. My name is Tilden Moschetti. I am a syndication
attorney with the Moschetti Syndication Law Group. If we can
help you with your syndication, or investment fund, whether you
think it really shouldn't be a limited partnership, or you're
going to go with a limited liability company, we can help
you either way, make sure that you're set up properly, that you
get the right amount of compliance. But also, most
importantly, at the end of the day, you have somebody who's
experienced and somebody who has actual boots on the ground
experience, because I do my own deals. I've been in your shoes,
I've had to make the choice for myself on whether to do a
limited liability company or an LP. I am live with the
consequences of that decision, which fortunately has been an
LLC so there hasn't been negative consequences. But we
can help you as well. Give us a call if you'd like to talk about
your project, and we can take it from there.