As a syndication attorney for the Moschetti Law Group, one question I hear many times is, “what’s the best way for me to structure the entities for my syndication?”
It’s a great question, and most of the time there is a ‘best way’ to do it.
Because it is a syndication and an investment, I like to start thinking about it in terms of what people are going to be investing into – what I call the ‘Investment Entity’. The Investment Entity may be an LLC, it may be a corporation (talk to your account for the best choice for tax reasons and your attorney for structural issues on choosing one over the other). The Investment Entity is what investors will invest into, have a private placement memorandum for, and be what people think of as the investment.
Now, the investment entity doesn’t just run itself. But the best practice isn’t to have just you, the Sponsor, be the CEO or the Managing Member of that Investment Entity.
The best practice is to have you, the syndicating Sponsor to have your own Entity, what I call the ‘Sponsor Entity’. The Sponsor Entity is then the Managing Member or the Advisor to the Investment Entity. And you, as a person or a team of people, are the officers of the Sponsor Entity.
In this way, you are protected from liability. So what do I mean by that?
Let’s say an investor gets very upset about something. They file a claim against the Investment Entity, but they also file a claim against the Manager of that Investment Entity. Had that been you as a person, you would be vulnerable to losing everything. But in this case, the Manager is the Sponsor Entity, a company that limits your liability. Unless there’s fraud, the angry investor is not getting past the Sponsor Entity.
What this syndication structure does is shield you from liability; it’s a form of asset protection. And it also makes the management much simpler. As you go forward and operate your syndication, you may need to make any changes to how you are structured as a Sponsor. For example, if you have a group of people that are the officers of the Sponsor Entity, you can make changes amongst yourselves that don’t impact the investors and just get it done. If you were set up without the Sponsor Entity, investors would need to be informed.
So that is the typical way to do it.
Now one challenge, which comes up sometimes is if you’re doing a fund, something that owns multiple assets. In this case, you still have the Investment Entity, but that Investment Entity becomes a Manager itself of individual Asset Entities. (In real estate, you would have, as an example, an Asset Entity for each property.)
So that’s the best way to do it – the best way to structure your syndication.
If you need some help with your syndication, be it for real estate, you’re an entrepreneur, you’re raising some capital for your business, or you’re putting together that new cryptocurrency hedge fund. Give us a call at (888) 606-0990 or schedule a free consultation to discuss your syndication.