Should You Form an LLC for Passive Syndication Investments?
You’re about to make your first passive syndication investment, and you’re wondering if you should invest directly in your personal name or form a limited liability company (LLC).
You’re not alone. This is probably one of the most common questions we encounter from our investors.
I even wondered about this myself, so over the years I sought out the advice of numerous asset protection lawyers and CPAs.
The verdict?
Unfortunately, I don’t think there’s a clear cut answer on this one. This is a very personal decision and one where you’ll probably want to weigh the pros and cons before deciding what’s best for you.
What I can say is that the majority of our investors invest in their own name. I even did the same for many years. But after considering the pros/cons of forming an LLC, I recently decided to switch to using an LLC for my passive investments instead of my personal name.
My reasons for forming an LLC for syndication investments
Reason #1: Anonymity
One of the lesser-discussed yet potent advantages of an LLC, especially when formed in states like Wyoming, is the level of anonymity it can provide. As long as you do it correctly, Wyoming shields your identity from public records. What do I mean by doing it correctly? Wyoming allows you to use a third-party “organizer” to form your LLC. This organizer is the one who is listed publicly on Wyoming’s Secretary of State website. The organizer can be you but that would defeat the purpose. So to do it correctly, you’ll need to hire a third party organizer. We use Anderson Advisors to form our LLCs, and they serve as the organizer. Getting back to why anonymity is so important, it’s possible that investment documents or investor lists get out into the public realm. If that ever happens, your name won’t show up in any of the documents. Just some anonymous LLC. Because we like to keep our investment activities discreet, anonymity is important to us.
Reason #2: Estate Planning
This is maybe even more important anonymity for us. We like to keep estate planning really simple. Forming an LLC can simplify the process of transferring interests in passive investments into our trust. Having helped my parents with their living trust, I can tell you that our estate planning structure using LLCs is way more straightforward than transferring your interests into a trust.
Reason #3: Liability protection
Now you might have noticed that I listed liability protection as my third reason for forming an LLC for passive investments. The reason is that you probably don’t get a lot of additional liability protection because passive investors are generally shielded from liability by the general partners in a syndication. With that said, if there is ever any spill-over liability, the LLC may offer an additional layer of protection.
Reason #4: Asset protection
LLCs can potentially shield you from what people refer to as “external attacks.” This is when you get sued for something like a car accident and the plaintiff comes after your personal assets. Using a WY LLC may make it a little more challenging for a lawyer to find the WY LLC holding your passive investments because of anonymity, but I think the real benefit is Wyoming’s favorable charging order protection. What this boils down to is, it’s very difficult for creditors to collect from your LLC, so it may deter creditors from coming after you in the first place.
My reasons for forming an LLC for syndication investments
LLCs can potentially shield you from what people refer to as “external attacks.” This is when you get sued for something like a car accident and the plaintiff comes after your personal assets. Using a WY LLC may make it a little more challenging for a lawyer to find the WY LLC holding your passive investments because of anonymity, but I think the real benefit is Wyoming’s favorable charging order protection. What this boils down to is, it’s very difficult for creditors to collect from your LLC, so it may deter creditors from coming after you in the first place.
What is the downside of forming an LLC for syndication investments?
The biggest downside is the cost. It costs us around $250 to form a WY LLC and $250 annually to maintain the LLC. If you’re DIY-ing it and not outsourcing it to a company like Anderson, you also have the administrative burden of keeping the LLC in compliance with state and federal laws. Ever heard of FinCen and BOI reporting? If not, you’d better look into it!
One LLC for all investments or one LLC for each investment?
One other question you might have is whether or not to form one LLC for all of your passive investments or form an LLC for each investment. For me, the latter is just too cost prohibitive so I chose to go with one LLC for all of our passive investments.
So what’s best for you?
As you can see, it’s really a personal decision. It really depends on how much you value privacy and estate planning, liability and asset protection versus the cost of forming the LLC. For us, we felt the benefits of forming an LLC for our passive investments far outweigh the cost. Also, we minimized the cost because we bought the unlimited LLC package with Anderson, so our per LLC formation costs are very low.
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