I am in the process of publishing several dozen new investing articles about limited liability companies and limited partnerships over at About.com, a division of The New York Times.
The idea came to me a few weeks ago when a reader wrote and pointed out that millions upon millions of people will never own a share of stock or a bond but they will invest with their families in a small business, a hedge fund, a private equity fund, or a pooled investment account. From a tiny corner drugstore to a special real estate project, limited liability companies and limited partnerships are the legal structures through which those investments should be held, in most cases. When families opt for them, they can enjoy tremendous tax benefits, legal protections, asset secrecy provisions, and more, especially if using a so-called Nevada LLC or Delaware LLC.
After all, Warren Buffett used a limited partnership when he pooled money from friends and family back in the 1950’s in Omaha, Nebraska. His limited partnership agreement called for a percentage of the profits over a certain hurdle rate to be counted toward his account. It really wasn’t as complicated as people think. In fact, with the right attorney and accountant, it would be theoretically possible for a family to pool its money in a matter of weeks and be fully operational, acting from a single, consolidated entity.
In my own life, I tend to use limited liability companies that are manager-managed (as opposed to member-managed, which I explain in the new investing articles). That is because as most of you know, I don’t have any day-to-day role in the companies because I am an investor, not an operator. I can identify great prospects and fund them, but as for running the businesses, that isn’t where my heart or desire are. I could have just as easily have used limited partnerships but for the types of assets I hold right now at this juncture in my career, the limited liability companies made more sense for a variety of reasons.
For more information, head on over and check out the content, which I’ve linked to throughout this blog post.
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