Investors: Their Money - My Corporation
Hi,
I'm not new to investing, but would like some insight
on buying property with other people's money and
then paying them off with the proceeds of sale or
refinance.
Should I set up an LLC to hold the property (LLC as beneficiary through Land Trust)
Or should I set up an LP (is there much difference between an LLC?)
Or, is there a better way. I do not want to give them a controlling percentage of the corporation that is holding title to property.
Thanks for the replies.
-Jimbo-
[quote]
On 2003-03-24 23:10, Jimbo wrote:
Should I set up an LLC to hold the property (LLC as beneficiary through Land Trust)
Or should I set up an LP (is there much difference between an LLC?)
I would use an LLC rather than a corporation or a LP. The LP requires that you have a general partner and the general partner is jointly and severally liable for all of the debts and claims of the limited partnership. The LLC is similar, but you don't have any general partner and thus all members have limited liability.
I personally like the LLC because it is much more flexible than a corporation and doesn't cause tax problems the way a corporation does for holding real estate.
If you don't want the investor to have any management voice in the LLC, make sure that you give them only nonvoting LLC interests. I would suggest that you talk to a good business attorney about setting up an LLC for you, preferably one that is also knowledgeable with the tax law. If the business attorney is also familiar with real estate investor and real estate law issues, all the better.
Most real estate attorneys that practice only real estate law do not know the nuisances of the LLC laws and tax laws, so make sure you find one that can draft a more complicated LLC agreement.
Since you are at it, ask the business lawyer if offering LLC interests to investors will violate federal or your state security laws. LLC interests (and stock in a corporation) are considered securities and if you make solicitations for investors incorrectly, you will find yourself in trouble with the SEC (Securities and Exchange Commission) and your state agency responsible for policing the security laws. This should not be take lightly because violating security laws may subject you to criminal, as well as civil penalties. Have the attorney explain the exemptions under the securities laws such as the "sophisticated investor exemption (i.e., known to lawyers as the Reg. D. exemption) or the small solicitation exemption (i.e., known in many states as the W exemption or the less than 10 solicitation exemption).
Notice that I said solicitations and not investors. Say that you talked to 11 investors (or worse yet, advertised in your local paper for investors for your LLC) without giving the investors a prospectus. Say the 11th investor agrees to invest with you. You have probably just violated your state security laws, because the law looks at the number you have solicited, not the number that has agreed to become an investor.
Hope that helps,
Taxjunkie
Hi Jimbo,
Have you considered just giving your investors a mortgage to the property, to secure their investment in what they are buying? It works well in my area. Instead of giving them a percentage piece of the deal when I have flipped it, I would structure the note to be a short term note, (just long enough to fix/clean up, and sell it, as well as a time buffer for a soft market), and give them a higher interest rate. The bonus is that the interest is not payable until the mortgage is paid off. Not all money investors are comfortable with this thought, but it just might work well for you.
Thanks for the information. I'm meeting with a respectable law firm that specializes in RE this afternoon.
We will be discussing this information (quickly)....he's really expensive!
Thanks again!
-Jimbo-