The investment group is putting up $400,000 into a new venture that will represent a 51% interest in the new venture. The new venture is going to be an LLC.
Should the investment group employ an LLC or an LP to hold the 51% interest in the new venture?
From a legal liability perspective it would appear that there is not much difference except that no LLC members could be liable, but the GP would have some liability as the GP?
From a tax perspective, not sure there is a difference as the amount received from the new venture would seem to be passive income and not subject to social security tax regardless of the entity.
Are there other liability or tax considerations to think about?
From a pure legal liability perspective, you should be an LLC. If you were to choose the LP from a tax perspective, then the GP should be a corporation or LLC to avoid personal liability. LPs used to be very common in PA, but with the advent of LLCs, there is not the same rationale to use the LP format. As you noted, the GP partners would have liability. If the GP is not a corporation or LLC, but rather, individuals, this means they have personal liability for the venture. Depending on the type of business, this would clearly be a risk that is not worth taking.
I would suggest that you consult with a tax expert, such as a CPA or tax attorney if you plan to form the LP. In addition, there are tax differences in PA between a corporation and LLC and they should be considered too.
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This response does not create an attorney-client relationship and is not intended to provide legal advice for your specific situation.
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There are a number of factors that may ultimately affect your decision, e.g., nature of the business, long term plans, etc. However, looking at it broadly, I believe that if you have chosen to operate the new venture as an LLC, then an LLC may be the best mechanism for your investment group. I infer that they are not yet organized formally and that they do not wish to hold an interest as individual persons or entities.
With the limited partnership there is a general partner that does have liability, whereas with the LLC there is no personal liability for any member, provided that the company is properly capitalized and properly operated.
One question to pose is why you have opted on the LLC and whether you have considered an S corporation or a C corporation. The LLC may be ideal for your venture, but often entrepreneurs use the LLC when something else might work better.
In sum, if you have the Venture LLC and the investors which to own their 51% collectively, they may wish to form an LLC which will hold the 51%. Be certain that your operating agreement meticulously addresses governance of the LLC. LLC members vote on everything absent a contrary provision in the agreement. The investment is substantial, so it will be important to dot i's and cross t's.
I am happy to discuss if helpful.
Cicero, Mehta & Sprang, LLP
Admitted in PA, OH, MD, DC
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Law Offices Michael J. Brooks, Esquire
Attorney@Law-Brooks.com “Perspective from the Legal Vantage Point”
There is one current tax issue in Pennsylvania. LLCs are subject to the capital stock tax. For that reason the best way to hold investments, in Pennsylvania is usually in a Limited Partnership with an LLC holding 1% as general partner. Note: Pennsylvania is phasing out the capital stock tax. The capital stock tax is anticipated to be completely eliminated in Pennsylvania by 2014.
Disclaimer: Please note you should not rely upon the information provided herein as legal advice. It is for general informational purposes only. Legal advice can only come from a qualified attorney after having had an opportunity to become familiar with all of the fact specific circumstances of a particular legal matter, and then to apply or research the relevant law.
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Securities / Investment Fraud Attorney
Another twist on this is if you anticipate getting CA investors involved, as there are peculiarities with their franchise tax regulations.
The foregoing is not legal advice nor is it in any manner whatsoever meant to create or impute an attorney/client relationship.