One of the first steps to creating an SPV is establishing a Limited Liability Company (LLC). The LLC is a distinct company formed solely for the purpose of aggregating capital to invest into another company. An LLC is not the only structure that can be used for this purpose, but it’s the structure used by all Sydecar SPVs and funds for a number of reasons.

Understanding the LLC 

An LLC is a flexible business structure allowed by state statute, meaning that each state has different rules and regulations that govern their LLC structure. Fun fact: The first state to establish an LLC structure was Wyoming in 1977. LLC owners are referred to as “members,” and each member is afforded exactly what the name suggests: limited liability. Prior to the LLC, the most common alternatives were general partnerships or limited partnerships. In these structures, at least one partner is required to have unlimited liability, meaning that they could be held personally liable for the debts of the company. On the other hand, limited liability dictates that a member can only be liable for the debts/obligations of the company up to the amount they invested.

Because an LLC is a state designation, it allows flexibility in how the company is treated for tax purposes. Most LLC members elect to be taxed as partnerships. You may have heard LLCs referred to as “flow-through entities,” which means that all income and expense items flow directly through to the members, thereby maintaining their unique tax attributes. Each member then reports and pays tax (or deducts loss) on their share personally. Therefore, LLCs allow a unique combination of limited liability with the tax advantages of a flow-through entity.

Let’s explore the flexibility of an LLC a bit further…

Any type of entity can be a member of an LLC, including other LLCs, C-Corps, S-Corps, qualified accounts (IRAs) and more. This gives SPV investors the flexibility to register their membership in a variety of different ways. However, investors should be mindful of the tax treatment of an LLC. If the LLC elects to be treated as an S-Corp for tax, it will be subject to the shareholder restrictions imposed by S-Corp status. For example, in an S-Corp, only individuals or certain trusts/estates may be shareholders with a maximum of 100.

In some cases, you may want an LLC to elect to be treated as an S-Corp for tax purposes. For example, if a VC’s management company wants to payroll its owners, treating the LLC as an S-Corp for tax purposes may be advantageous. This is because paying the LLC members as employees allows for appropriate taxes – like Social Security & Medicare (FICA taxes) – to be withheld throughout the year while the S-Corp pays the employer half. This allows the LLC owners to avoid having to pay FICA taxes through their individual returns often referred to as “Self Employment Tax”.

Another benefit for the LLC structure is that it can assign management functions. For instance, an SPV or fund that is structured as an LLC can assign management functions to another LLC. This other LLC (often referred to as a management company) can be assigned as the manager of multiple funds or SPVs, thus centralizing management functions to one company. Now, as discussed earlier, the management LLC can elect for tax purposes however it wishes.

Last but certainly not least, certain states (specifically Delaware, Iowa, Nevada, Illinois, Texas, and Tennessee) allow for the creation of a special type of LLC called “Series LLCs.” Under this unique structure, there is a single “Master LLC” that is registered with the state and pays the appropriate taxes/fees on an annual basis. An unlimited number of distinct Series LLCs can be created under the Master LLC. Each Series LLC is protected from any adverse judgements against any other. This structure is particularly cost efficient for investors who are using LLCs to invest in startups on a deal by deal basis using SPVs.

LLCs and SPVs

LLCs are a powerful way to customize any business structure that can be particularly beneficial in the context of venture investing. Sydecar uses the Series LLC structure to establish our SPVs and funds because of the time and cost efficiency that it affords our customers. This powerful structure, combined with our game-changing infrastructure, makes it possible for anyone to spin up an SPV in minutes with a reasonable cost ratio. 

Conclusion

The Benefits of the Series LLC Cost Efficiency

Under this unique structure, there is a single “Master LLC” that is registered with the state and pays the appropriate taxes and fees on an annual basis. An unlimited number of distinct Series LLCs can be created under the Master LLC. Each Series LLC is protected from any adverse judgements against any other. This structure is particularly cost efficient for investors who are using LLCs to invest in startups on a deal by deal basis using SPVs.

Limited Liability: In an LLC, a member can only be held liable for the debts and obligations of the fund up to the amount they invested. In contrast, the general or limited partnership structure which has historically been used in venture capital requires at least one partner to have unlimited liability, meaning that they could be held personally liable for the debts of the fund.

Tax Flexibility: Because an LLC is a state designation, it allows flexibility in how the company is treated for tax purposes. Most LLC members elect to be taxed as partnerships. LLCs are “low-through entities, which means that all income and expense items flow directly through to the members, thereby maintaining their unique tax attributes.

Assignment of Management: The Series LLC allows you to assign management functions to another person or entity. An entity can be assigned as the manager of multiple funds or SPVs, thus centralizing management functions to one company.

Membership: Any type of entity can be a member of an LLC, including other LLCs, C-Corps, S-Corps, qualified accounts (IRAs) and more. This gives SPV investors the flexibility to register their membership in a variety of different ways.