Limited Partnership

For tax purposes, I’ll be setting up an LP investment fund for family and friends to invest through. I remember reading some Rule 5xx on SEC website with requirements and exceptions to investors. Anyone know this rule, and any others I should look at. The investors are all close family or friends and legally won’t cause a problem, but I just wanted to set it up so I can take a cut and write some expenses off. Any suggestions are appreciated.

Do you really want to be doing this…

It’s not a ton, around 100k, I spend the time researching everything already, they are sick of Edward Jones, and they know I am smart. Am I missing something. Not being sarcastic, I read and respect your input and comments here JoeyD.

joeyd is right…this sounds like a bad idea, for a whole bunch of reasons. i dont know your job situation, career history, education level, industry knowledge, etc, so admittedly, i might be off on a couple things. if you’re coming to AF for what amounts to legal advice, you should not be accepting money, period. it’s a tip-off that you dont know what you’re doing. setting up this kind of partnership is a serious thing - hire a lawyer, hire an accountant. i know about this stuff because i have my own LLC and i am an LP for several other partnerships. it’s not as simple as it looks. second, you better know what you’re doing. my mom wanted me to manage her IRA for a long time but i refused. yes, the idea of managing someone else’s money is alluring and makes you feel important, but you have to consider how you’re going to look dad/mom/brother/friend in the eye and tell them you lost half their money, perhaps without a sufficient explanation. i only finally started managing my mom’s IRA a few months ago after i had a couple years experience as a PM, had done well in my own account, and received my charter. finally, it worries me that you’re doing this for money. i’m assuming you have zero experience seriously managing other peoples’ assets, so why should they pay you??? and they’re family! i manage my wife and mother’s IRAs, but i certainly dont CHARGE them for it. besides, an asset base of $100k is simply too small to try to earn a couple bucks off of. you should step back for a sec and HONESTLY ask yourself a) why you really want to do this, b) are you qualified, and c) are you prepared for the responsibility of this if things go awry. good luck.

You don’t need an LLC to write off expenses, although creating an LLC will give you plenty of expenses to pay. If you are doing a fund with family/friend money, family trust is probably enough to get you started. The only advantage to some kind of incorporated structure is that you might be able to get around the gift tax issue for donations larger than $12,000, although just a contract stating that you are managing money for your friend and it is not a gift, may get you exempted. The other issue (I’m thinking out loud here), is that if you are incorporated, you may get different tax treatment for capital gains and income than you would if you were just having contributions to your personal account. What I mean is that if your dad gives you $50,000 to invest, and you make 25% next year, the $12,500 gain becomes taxable to you, even though the 50k+12.5k is not technically yours. You can of course pay it out of the fund’s gains, but depending on your other income status and the fund’s tax status, it may or may not be optimal, and it may be harder to compute, given that your other income and deductions may be mixed in with the marginal rate. I can see the logic of setting up a corporate structure to handle this, but you may not need to go through all the stuff that a normal LLC hedge fund goes through. You are allowed to manage money for friends and family members (parents do it for their kids often) without having a separate corporate entity. For example, trusts are often used this way. In fact, your folks might create a trust for you that you manage but are not allowed to make withdrawals until some age or until they pass away. Now the disclaimer: I am not a lawyer, and wegowayback’s comment that you need to talk to real lawyers (maybe a family friend who’s one) to figure out what the advantage is. Maybe an S corporation is more sensible (I think it’s the cheapest one to manage) just to create a structure that is separate from you as a juridical person. [I’ve been investigating the logic of setting something like this up, but my reasons are a little different from yours. Writing some expenses off and taking a cut (of the profits?) is not the main issue. For me, the main issue is gaining experience managing a portfolio of assets, and I need to come up with a critical mass so that transaction costs and risk controls don’t become prohibitive. The friends and family members who I’m hitting up understand that this is a risk. They trust me not to abuse the money they’re giving me, but they understand that I’m also learning. Therefore they are willing to take some losses (my folks see it as a donation that they might actually get back one day), as long as the losses aren’t me taking the money and spending it on wild parties or something]