Tenants-in-Common versus The Formation of an LLC

It is a very common occurance at Entrust where clients need to pool funds together for a particular investment. We receive many questions in regards to whether or not they should form a LLC or not. While I am not an attorney and do not know the legal justifications for creating an LLC, I can tell you what we see most often. In most cases the LLC is not needed and Entrust can handle the transaction while saving you the money.

Lets look at several examples of some individuals who want to "pool" funds together to purchase real estate.

1) John Smith wants to buy a condo with 70% from his IRA and 30% personal cash.
-Typically, clients like John would just purchase the property as tenants-in-common. The deed would reflect two owners, John and John's IRA. The deed would read as follows "Entrust Freedom, LLC FBO John Smith, IRA #12345 as an undivided 70% interest and John Smith as an undivided 30% interest". There are two legal owners to the property (the IRS recognizes the IRA as its own entity). John has a tenant pay rent. The tenant writes one check to John each month for 30% (subject to taxes) and one check to the IRA for 70% (tax-deferred). Similarly, expenses are paid on a 70/30 split with Entrust (or an unrelated property manager) cutting checks for the IRA ownership.

2) Betty Jones wants to buy a small strip mall with 4 other investors. Betty and one other investor want to use IRA funds while the other three plan on using personal funds. In this case, it would be ridiculous to purchase as tenants-in-common because each tenant would have to write five checks to five different owners. In this case, the group would form an LLC. The operating agreement would account for ownership percentages of the members (adding to 100%). The managing members responsibility is to distribute earnings to each of the members, two of which are IRA's with Entrust. The managing member does NOT have to be one of the invested members, although it can be (as long as the managing member isn't someone using their IRA). The managing member would also pay any expenses the LLC has out of the pooled funds. The key to this transaction is to make sure the operating agreement shows the IRA interest. Rather than Betty Jones being a member, it is "Entrust Freedom, LLC FBO Betty Jones, IRA #12345". Entrust will need a copy of this operating agreement.

Feel free to contact us to discuss your scenario's in regards to pooling funds together for investment purposes. We would be glad to share ideas with you so that you are well informed.