How to Provide Individual Investment Options for Multiple Stakeholders in an LLC

How to Provide Individual Investment Options for Multiple Stakeholders in an LLC

Posted by on Jan 16, 2021

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Limited liability companies (LLCs) have been a preferred business entity among multiple stakeholders since the 1980s.

Many legacy Limited Liability Corporations were formed by family members to pool funds to invest in commercial real estate. Perhaps the most famous example is Walton Enterprises LLC, the Limited Liability Company founded to serve the beneficiaries of Walmart founders Sam and Helen Walton. Most family trusts and business partnerships won’t reach those same lofty heights, but they still remain a useful tool for members to make larger capital investments than they could as solo investors.

Dissolving a legacy LLC or other joint business entity created to purchase real property assets can be more difficult than having your aunts and uncles agree on which kind of pie to eat at Thanksgiving, though. If some members want to keep the LLC intact while others feel it's time to quit the landlord game and sell their properties, it can create tension among members that can be hard to resolve amicably. 

However, there is a way to satisfy both mindsets and help each stakeholder create an optimized wealth strategy regardless of their disposition.

From LLC to Individual Investors: Delaware Statutory Trusts

LLCs can provide many important benefits for stakeholders, including protection from personal liability incurred through business debt. Likewise, an LLC’s assets are protected from individual stakeholder debt. It’s also a simple business entity to maintain since stakeholders aren’t required to conduct annual meetings or meet the strict record-keeping requirements of corporations.

While LLCs can be a great vehicle for pooled investments, it can be onerous to break them since the LLC gets all the tax breaks rather than the individual members within the Limited Liability Company. If the LLC is dissolved and its real assets are liquidated, each stakeholder can face significant capital gains tax liabilities.

One solution that avoids that scenario is to have each member reinvest his or her shares into a Delaware Statutory Trust (DST).

What is a Delaware Statutory Trust?

Delaware Statutory Trusts are investment vehicles that provide solo investors access to institutional-grade commercial investment properties that usually are much larger than properties they could acquire by themselves.

These professionally-managed commercial assets are usually the same targets purchased by endowment and pension funds, insurance companies, REITs, and well-heeled institutional investors. They include:

  • Retail and office complexes
  • Industrial buildings
  • Multi-family apartment complexes
  • Self-storage facilities
  • Medical office buildings

These properties may also provide investors with tax-advantaged monthly income. And since investors are purchasing fractional shares in the DST, they can invest in multiple Delaware Statutory Trusts to create diversified portfolios that may help them spread their investment risk. 

Potential Benefits of Breaking an LLC to Invest in a DST

Delaware Statutory Trusts allow LLC members to sell legacy properties and avoid paying capital gains, depreciation recapture, and other taxes by individually reinvesting the proceeds into professionally managed DSTs. Regardless of how the LLC shares are split among owners, once proceeds are reinvested into a Delaware Statutory Trust, the tax benefits flow through to each individual. The former LLC members can decide to hold, divest, or turn their DST shares into a REIT through a process called UPREIT. 

The key here is that by divesting a legacy property owned through an LLC and reinvesting the proceeds individually into DSTs, members can choose how to proceed on their own -- they no longer need input or agreement from other members of the LLC. Members can choose their own investment timeframe, scale, and philosophies.

Is Breaking an LLC the Right Decision?

Dissolving an LLC typically requires unilateral alignment of goals among members -- it could be easier to get your relatives to decide on pumpkin or rhubarb at the holiday dinner table. The decision to break a legacy LLC and have members invest in DSTs involves a lengthy conversation between LLC members, experienced tax professionals, and financial advisors to determine the best course of action for all stakeholders.

This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. Consult with your tax advisor regarding your individual circumstances.

 


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