LLC, S Corps, C Corps… what kind of structure should you choose for your syndication? My name is Tilden Moschetti. I am a syndication attorney with the Moschetti Syndication Law Group. Today we’re going to go through the different kinds of choices that you have and explain what the options are and why you should choose one over the other.
A very common question is what exactly kind of structure or legal entity structure should I choose – LLC, LP, etc., for my syndication. So we’re going to go through the different choices that you have here. One to me stands out as the front runner for almost every situation. We’ll go through why and explain why the LLC is probably your best pick, but we’re going to take a step back, and we’re going to go in with fresh eyes.
Let’s open up a whiteboard here and take a deep dive into these different kinds of options that you have. So we’ve got sole proprietorship, partnership, LLPs, LLCs, and corporations. Now, why have I put S Corp on here, too? Good question. S Corp is a tax filing status. It isn’t an actual entity status in and of itself. So we’ll talk about what that means in just a minute.
These are the main kinds of choices that you have. Now, one of the main questions is where we start: how many people are we talking about? Because that could rule some out immediately. How many people are in charge of this and can become members?
Clearly, a sole proprietor is just one person. If you have no filings made, you have a sole proprietorship. Now, if you have more than one person, and you never made a filing with your state, then you have a partnership, a general partnership. Typically, you’ll have a general partnership agreement, but anytime more than one person comes together and does something in this kind of structure in a business-type structure, then it’s a partnership.
But that isn’t the only kind of partnership that there is. There’s also what’s called the limited liability partnership, or an LLP, or an LP for limited partnership, very similar structures. The only difference between them is an LLP has a little bit more asset protection on its layer than a typical LP amongst all levels. So the GP also has limited liability on the LLP part of it.
An LLP is two or more people or members are a part of that organization. An LLC can be one or more, right, so you may have a single-member LLC, which is just acting as a pass-through entity for that person. And then you also have a corporation, which also really only needs one person as well. It may require officers but it only needs one shareholder.
Let’s talk about asset protection. That’s another major part of why you may choose one over another. A sole proprietor has none; there is no asset protection as part of a sole proprietorship. There is also basically no asset protection for a general partnership for general partners, and there might be a little for LP for limited partners, depending on how you were to set up that partnership itself. For LLPs, there is some protection for GPs and then there is good protection for LPs, for limited partners. For LLCs, there is just across-the-board, pretty good asset protection, both for the people who are basically acting as limited partners and for people who are in charge of it. For managers, there’s good asset protection as well. For corporations as well, there is also good asset protection.
So in terms of asset protections, we’re probably thinking LLCs or corporations are our best bet. In terms of any structure, there’s always going to be some level of maintenance and some sort of governance that is required. So let’s talk about the differences there.
For sole proprietorship, it’s super easy, very little to do. You may have a DBA that you need to file with a county or some other kind of city or something like that; it changes state by state. For a partnership, it’s also pretty easy. You should have at least a partnership agreement. So there is that level of maintenance and governance that you have to have. You don’t have to have that, but you should have it.
For an LLP, it’s easy to moderate depending on how it’s filed and how it’s formed. Typically, you’ll file an LLP with the state, and it’s fairly simple to do. There may be annual filings that need to take place with the state, sort of annual reports. LLC is also easy to moderate. Typically, there will be just an annual filing with the state to let the state know what’s going on. There may also be some officers that are appointed or things like that. There may be some sort of maintenance at your choosing and governance that you’re choosing to make it more complicated, but to make things run smoother.
Corporations, on the other hand, are complex. There needs to be minutes taken, annual meetings, as well as annual filings. The last topic in making the choice is taxes. So in taxes for a sole proprietor, we’re just looking at individual tax returns. A sole proprietor is reported on your 1040. It’s just part of the business itself. A partnership has a partnership return and it’s taxed as a partnership. An LLP is also taxed as a partnership.
Now LLCs, on the other hand, are interesting because you have a choice. You can choose to either be taxed as a partnership, or you can be taxed as an S Corp. S Corps are limited to 100 members. So if you were to choose an S Corp, you could only have 100 different members in there. And in Corp, you have a choice as well; you could choose to be taxed as an S Corp or you could be taxed as a C Corp.
In general, in a syndication where you’re not going to have a huge number of things and you’re not looking at going public, it may be it’s a real estate syndication where you’re looking to put together something that has maybe 50 or 60 different investors into one simple project. And that project goes away over a finite period of time. LLC is almost always going to be your choice.
Well, what about LPs, you may ask, because it is also a choice. LLPs, in my opinion, have gone kind of out of favor, or limited partnerships. LPs have gone out of favor in doing syndications and funds. We still use them in a very separate kind of context. We still use them for setting up very different kinds of instruments that are syndications and funds, but for the vast majority of people, LLCs is the right choice.
Now why is that? Well, mostly investors have demanded that they have a little bit more seat at the table, which is what they get as part of a membership in an LLC. Corporations are probably not going to be the main choice unless you’re either looking at going public. Like if you’re building a return, you’re going or you want to set up as a REIT, you’re starting as fun. But your eye is to going public, you’re probably going to choose a corporation. If you’re also an existing business, and you’re thinking that, well, we may want to go public as well, you may want to do it as a business.
Now that said, talk to your accountant to make sure that you are tax attorney and make sure you understand the different kinds of things between a partnership, an S Corp, and a C Corp because what I’ve given you here is just a very broad overview of what those different tax structures are. And they can speak more readily to your specific situation. Certainly take their advice over just something you hear in a video.
So those are the main types of structures that you’d have. Almost always we’re talking about limited liability companies, formed in whatever state is appropriate. To find out exactly which state is appropriate, again, you’d want to talk with an attorney or tax attorney and really kind of delve into which state makes the most sense for your particular situation.
So hope that helps. My name is Tilden Moschetti. I am a syndication attorney for the Moschetti Syndication Law Group. We help syndicators and funds put together Regulation D offerings under rules 506b and 506c.