Each business formation has specific strengths and weaknesses. They also have their own structures. For instance, a corporation will have a president or a CEO. A sole proprietorship will have a sole proprietor. The same is true for LLCs, and one of the most important roles to understand here is that of the manager.
In this post, we will explore the manager’s role and what it means for your deal-making efforts.
The Manager
In LLCs, the highest position is a manager, like a corporation’s CEO or president. With syndications, you can individually be a manager and have that operating risk. Or in the case of a lawsuit, you will be sued individually, and it’s important to avoid that. For that reason, many people choose an LLC or a corporation to serve in that management role function almost all the time.
If this is your first deal, you’ll need to work with an experienced legal partner to create a new LLC. But once we have a manager entity set up, you can reuse it repeatedly because it already has that risk at some point. Some lenders are happy to work with this arrangement, but that’s not true for all of them.
Some lenders also demand something like a single-purpose entity (SPE) for the manager LLC. Those are generally for those trying to close a $50 or $100 million real estate deal.
In the normal course of events, you have a brand company that’s publicly facing, and everybody knows about it. You also have the syndication company that all the investors invest in to acquire the asset. The management company serves as the manager, the entity in control of this syndication company. In most cases, the management entity is wholly owned by the brand or by the dealmaker, but outside your asset protection structure.
Why would we want to do that? There is a high likelihood that the manager LLC will be sued if there’s a lawsuit. You want to separate it from all your other belongings and assets and having them separately contained will help protect you in the long term. Why wouldn’t somebody be interested in your asset protection structure, and why wouldn’t the angry investor sue that?
Of course, you cannot stop somebody from suing. However, if you have a company with no activity, that did nothing, not even communicate, it was just there to hold on to interest, it’s an uphill battle to try to find any liability. Having a holding company that does nothing but hold these interests is like a best practice.
Manager Entity Address
Manager entities are normally formed wherever it’s most convenient. Wyoming and Delaware are two of the most popular because they’re simple and easy. Many states don’t require the management entity to be in the same state where the asset is being purchased. For instance, a Wyoming-based management entity is free to purchase an asset in Texas. It’s best to look for states with very strong asset protection laws and then form the management entity there.
When forming a manager entity, it’s critical to take the right steps. As with forming a syndication, don’t use your home address or personal phone number. It’s important to build that wall between you and the manager entity – keep your information private and out of the hands of potentially angry investors who begin investigating the company’s structure looking for someone to blame because a deal didn’t go the way they had hoped.
Always plan to use an actual business office address, even if it’s an executive suite or a PO box. Obtain a business phone number, too, just to build further walls between your personal life and the business.
Manager Control Parties
This is where the actual partnership between you and your JV or operating partners will come together. This is where you should have conversations about are separate roles, how maybe one partner has the role of capital, and another has the role of operations or differences, and how you’re going to share management fees, distributions, or the requirements of making decisions.
So, your manager entity is where the operating agreement comes together with all the elements of a partnership, the operating terms between you and the other parties involved in the deal.
If you have partnerships forming, work out the terms with your partner. During the syndication process, you still document everything and have a firm basis for a partnership moving forward. If you do this with one of your partners to acquire a property, use that same manager entity for the different properties you have that same agreement with.
If you decide to do a deal with a different partner or on your own, the previous manager LLC is not applicable, so you must set up a new one. However, if only you are involved, this can be disregarded so that there’s no separate tax return. The taxes, administration, and annual costs are headaches and it’s important to minimize them. Having disregarded entities and not having to file a tax return is a great way to do just that.
In Conclusion
Launching a successful deal requires many moving parts. One of those could be forming an LLC to act as the manager and to erect a wall between your personal assets and the business. Not sure if this is the right path for you? Get in touch with us at Crowdfunding Lawyers to schedule a no-obligation consultation. We’d be happy to discuss your needs and goals, and the best structure to help you reach them.