Key Takeaways

Transcript

Why Entity Type Matters

LLCs, partnerships, corporations, sole proprietors – what’s the right type of entity for your syndication or fund? Today we’re going to do a video that’s a blast from the past. It’s a couple years old, but it’s still very relevant and valid information. It’s a discussion about how you would choose your entity type, and what entity type would fit for your syndication or fund. I hope you find it useful.

Foundation and Entity Choice in Your Company Structure

We’re going through the course, specifically talking about company, and even more specifically, we’re going through foundation. Today’s segment discusses entity type and what type of entity you should be forming. You’ve heard lots of different things about corporations, LLCs, DBAs – everybody’s got an opinion. 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.

I’ll give you a little bit of advice and feedback on the next steps and who you’d want to talk to to really firm up that decision. Then you’re going to have pretty good guidance on how to do it, and ultimately, you’ll make a decision on what it’s going to look like.

These types feed back into your structure. That management entity you’re going to form might be an LLC, it might be a corporation. The buildings themselves might be LLCs, they might be corporations. You might even want to do them as DBAs, though I doubt that you would actually want that.

Overview of Entity Types

Let’s talk about the different types. We’ll start with the simplest: DBAs. DBA stands for “doing business as”. These are normally filed in your local city or municipality. Basically, it just lets them know that there’s a fictitious name you’re going to be using associated with a business. This covers everything from sole proprietors to partnerships.

Next, we have partnerships. Again, that typically gets filed at the local level to get a name associated, but this really depends on your particular state. In California, for example, if you’re going to have a general partnership, you actually don’t need to file anything with the state. Not all states follow that method; some do require that you file partnership agreements with them. So you need to check on your local rules if you decide that a partnership makes the most sense for what you’re going to be doing.

The next type is an LLC, which stands for Limited Liability Company. These have been around since the 1970s. It was an alternative that came out of smaller companies not being happy with all the requirements corporations were being held to. So they are a little bit simpler and have some different nuances as well.

Lastly, we have corporations. A corporation is its own entity as well. It gets filed with your state and is a very common mechanism. You’ve surely heard of them.

Entity Type vs. Tax Classification

You may be asking, “Why didn’t I write S corp or C corp here?” S corp and C corp are actually tax ways of filing; they have tax implications. They don’t have actual implications as it relates to an actual property itself. 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.

We will be talking a little bit about tax strategy, but not a lot, because it gets really specific for your own particular needs. For that, you’ll probably 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 segment as well.

Ownership Rules by Entity Type

So these are the four main types of entities that we’re going to go through. The first question we ask ourselves is, how many owners can there be? This will sometimes rule some things out for you. A DBA is one person – it’s always one person, a sole proprietor acting as one person. A partnership always requires two or more people; you can’t be a partner alone. You can actually have one person as an LLC or as a corporation. So if you have more than one person, that kind of rules out DBAs, but all the others are on the table.

Asset Protection: Inside-Out and Outside-In

Now let’s talk about asset protection. Asset protection is very important. There are two kinds of asset protection that we like to talk about: we have what’s called inside out and outside in.

Inside-out asset protection 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 the outside.

Outside-in is the opposite of that. So if 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.

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. We have two kinds of partners: general partners and limited partners. The general partner is the one who makes all the decisions, who does all the work. The limited partner is the person who mostly just invested the money and just sits back and lets the general partner do the work. As far as asset protection goes for the limited partner, it is good asset protection, but there is no asset protection for general partners at all.

Now for the LLC, it is good for inside-out protection. It’s probably somewhat less good for outside-in, but it’s not as well tested.

Corporations are good for inside-out liability. It is bad for outside-in as long as it is a closely held corporation.

You probably are going to get the most amount of asset protection from the LLC.

Governance and Record Keeping Considerations

In terms of governance and management, this is what we’re talking about here: how easy is it to get through all the paperwork and comply with all the legal formalities.

For DBA, it’s easy. For a partnership, it’s also pretty easy.

For an LLC, it can be easy to complex. This is where it comes down to whether the LLC is member-managed or manager-managed.

A corporation is almost always complex. You typically need a board of directors and officers.

Record keeping for DBA is extremely easy. For a partnership, it’s pretty easy. For an LLC, we’ll put moderate. For a corporation, it’s much more complex.

If you don’t do that, your corporation could very easily be determined by a court as not being a legitimate corporation, and you’d lose any sort of asset protection that you had from the very beginning.

Jurisdiction and Multi-State Issues

Then you’ve got your multi-state issues. For example, 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 I have to let California know that this foreign corporation, this Delaware corporation, is doing business in its state.

Because of that rule, we’re not going to go into choosing jurisdictions beyond the easiest way to choose a jurisdiction, which is to just put it wherever your company is.

Making the Final Entity Decision

Now, when it comes time to make a decision about what kind of entity you think you need to form, I don’t think any attorney would ever recommend anybody do something as a sole proprietor, or even as a partnership for something like this.

Now an LLC versus a corporation, it really comes down to a few things. How easy do I want my governance? And how easy do I want my record keeping?

Almost always for the property itself, you’re going to use an LLC, because they’re so much easier to put together and the paperwork is so much less.

It is quite easy to do different entity types for different types of entities. So your properties will almost always be LLCs. But perhaps your management company will be a corporation, and that’s totally okay.

Next Steps and Closing

Go through that, think about that, make a decision. And the next step then really is to get that filed. I would file your management entity sooner rather than later. That’s what you’re going to be building your name and reputation under.

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 this 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 the right 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.