Credit investors and Asset Protection/Accounting - Posted by Konrad

Posted by Brent_IL on November 08, 2004 at 18:33:34:

I think a good tax attorney should be consulted.

Here it is. Any time that you are doing anything that involves taxes, tax allocations, interests, partial interests, or an association of any kind; the time to get the paperwork right is BEFORE you do the deal. These things are a legitimate part of deal-making.

This stuff is nothing to fool around with. After the fact reconstruction is always suspect. What you describe as a ?partnership? with a credit partner, may be described by the SEC as an unregulated security that violates half-a-dozen state and federal laws. The IRS may say the interest division is a sham. This could open the door to your LLC being pierced.

I?ve done the ?One investor-One property? approach. It gets to be unwieldy trying to match them up.

I?m not a lawyer, just asking questions. Were you aware that Member-managed LLC?s can have different classes of Members; some Voting, some not; some receiving periodic distributions, some not. Perhaps it came to your attention that if an LLC is taxed as a partnership, Members, or some Members, or a class of Members, can post Certificates-of-Deposit held in their own name with the company?s primary bank which can be used as collateral for LLC loans? Members, or some Members, can sign loan guarantees.

Just some thoughts.

Again, good tax lawyers are invaluable when compared to the downside.

Credit investors and Asset Protection/Accounting - Posted by Konrad

Posted by Konrad on November 08, 2004 at 09:54:05:

For financing purposes, we recently closed a purchase on a rental property in a name of one of our credit investors. We are planning on holding this property for next few years. The credit investor gets a percentage of ownership for qualifying for a mortgage and closing in their name and our company gets remaining percentage for finding the deal and managing the project. My question is in reference to the best legal structure for this “partnership”. I understand this isn’t legal advice, but I wanted to toss it out there for suggestions.

Should we
Set up a Trust and assign percentage of interest to our LLC and percentage to the credit investor? (Does that offer any asset protection for the credit investor? Would we need a separate Tax ID for the Trust or would it flow to our LLC/LP?)
Set up an LLC with the credit investor as one member and our LLC as the other member?

What are the advantages and drawbacks of each? I understand taht either way, we’ll need a new Tax ID and separate Tax return. Is this correct? Any alternative suggestions? We are planning on taking on more credit investors in the near future and replicating this structure and we are looking for a least burdensome solution legally and tax wise.

Thanks in advance.