20 years ago, almost all syndications and investment funds used limited partnerships. Now, the landscape is different. The vast majority of them use Limited Liability Companies instead of limited partnerships. So what makes the most sense for your syndication or investment fund? I’m going to give you some thoughts about the advantages and differences, and then you can decide for yourself what 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 and syndications together for syndicators and investment fund managers, helping them make sure that they are successful. As part of that, we spend a lot of time on the structure, not only on how distributions happen and how all the rights are set up, but even from the very top level, what that entity structure looks like.
One of the key questions often asked at the very beginning of an engagement is, “Should we do it as a limited liability company? Or should we be a limited partnership?” There are some major fundamental differences, and they might not be the ones that you would think.
The first main difference between the two comes down to taxation. You might think that the taxation is the same, right? They’re both taxed as partnerships. Well, limited liability companies have the option to be taxed as a corporation, but most of the time, you don’t do that. However, they are still different. The IRS treats partnerships differently based on whether it’s an LLC or a limited partnership.
For example, an LLC has straight pass-through taxes; it’s very clear-cut. You get your K-1s, and 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. 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 (that’s you, the sponsor) 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 you as a sponsor.
The second difference is management. LLCs are incredibly flexible; we can tool them and change them to really construct a whole structure that makes the most sense for your syndication or fund. Limited partnerships have much less flexibility; the general partner is in complete control. That may not fit with what some investors need in order to come in. That’s why I think we’ve seen the shift from limited partnerships to limited liability companies over the past 20 years.
The third change, which is also very important for you as a sponsor, is liability protection. You might think because it’s called a limited partnership that you have liability protection as a general partner. You don’t. There is no liability protection for general partners of a limited partnership. They will have that as part of a limited liability company, but not as a limited partnership.
Some of the advantages of an LLC are:
- Flexibility in the structure
- Straight pass-through taxation
- Asset protection for the sponsor
- Clear distinction between business assets and personal assets
- Ease of formation and maintenance
There are advantages to a limited partnership as well. There are specific tax savings that are only available to limited partnership organizations. For example, some equipment depreciation benefits are only available through limited partnerships. If that’s a key component of the structure of your syndication or fund, you might choose to do a limited partnership.
The second reason you might do a limited partnership is that there’s a very clear delineation of limited partners and general partners. However, we can change that in an LLC operating agreement to give you, the sponsor, essentially the same amount of control and rights that you would have in a limited partnership, with just a very small amount of difference.
At the end of the day, I almost always recommend people use a limited liability company. There are only specific nuances which may or may not apply to you and 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 should be a limited partnership or you’re going to go with a limited liability company, we can help you either way. We’ll make sure that you’re set up properly and that you get the right amount of compliance. Most importantly, you’ll have somebody who’s experienced and 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. Give us a call if you’d like to talk about your project, and we can take it from there.