Losers and Tax Returns

We hate it, but it happens: that promising company with the brilliant founder we invested in
has failed. At least we can take a loss for tax purposes. However, if you have invested through an SPV, it adds insult to injury to have to pay the professional fees to file the tax return in order to pass the loss through to the syndicate members.

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Decisions to be Made in Forming Investment Syndicates

Loon Creek helps investors form and administer investment syndicates. This is one
in a series of blog posts based upon our experiences in doing so.

An investment syndicate (also known as a “single purpose vehicle” or a “single
investment entity”) is a group of investors who combine together into some type of
organizational vehicle in order to make an investment in a specific company.
Usually the vehicle is a limited liability company (LLC).

In an another post, I wrote about some of the reasons investors may want to form
syndicates to make their angel investments. This post discusses some of the
decisions the investors need to make in setting up their syndicate.


A syndicate is a legal entity under the laws of some state. To form such an entity
and operate it throughout its life requires a number of decisions and actions, some
of which are:

• The state must be selected.

• The LLC must be registered with the state.

• The investors must decide whether the syndicate will be governed by vote of
the members (member-managed) or by a manager (manager-managed) or
some combination of the two.

• An operating agreement reflecting this decision must be drafted and signed
by all members. This agreement needs to adhere to the laws of the state in
which the LLC is registered.

• A taxpayer ID number (EIN) must be obtained from the IRS.

• Assuming the syndicate intends to invest under the accredited investor
exemption (Rule 501, Regulation D of the SEC), each individual investor must
attest to his/her/their accredited investor status.

• Records must be kept to document each investor’s accredited investor

• A financial vehicle (e.g. a bank account or an attorney’s trust account) must
be set up to receive, disburse, and hold the syndicate’s funds.

• Funds must be collected.

• Funds must be disbursed to purchase the investment and pay the set up and
operating expenses of the syndicate.

• Financial and investment records must be maintained for the life of the
syndicate, often five to ten years.

• Often a tax return must be filed and an accountant paid to file the return; in
some states an annual fee must be paid to the state.

• When tax returns are filed, individual K-1s must be prepared and sent to all
members who must then report the effect of the K-1s on their own individual
tax returns.

• Someone must be prepared to receive communications from the company,
and when appropriate, act on requests from the company such as
shareholder votes.

• Someone must keep records of the members who may get married, divorced,
die, transfer their interests in or out of trusts, and otherwise modify their
membership accounts.

• Someone must agree to be the agent for the entity, provide a physical address
in the state of formation and agree to accept service on behalf of the entity.


Each decision will impact the operation of the syndicate for its life, and naturally the
cost of setting up and managing the syndicate. Here are two examples:

• State costs. Each state charges a fee to register an LLC and some states
charge annual fees to keep the LLC active. For example, Idaho charges a one-
time fee of $100 to register an LLC, and does not charge an annual renewal
fee. Delaware charges $90 to register an LLC and charges an annual
franchise tax of $300 each year thereafter. LLC University posts a table of the
set up and annual fees in each state.

• Manager. Often, someone “volunteers” to be the syndicate manager and
perform the above tasks, frequently without compensation. I’ve made that
mistake three times myself. Each of my syndicates, by the way, is still alive;
one for more than twelve years. If you agree to be the manager, you are
potentially signing up for years of service. You may want to charge the
members for your time, and/or outsource much of the administrative work
to a firm like Loon Creek.

There are a lot of decisions to be made when setting up a new investment syndicate,
with potentially years of ramifications. Loon Creek has developed a number of best
practices with regard to the setup decisions in order to minimize the work and
operating costs of setting up and administering investment syndicates. In my other
posts I address some of these practices.

Loon Creek specializes in syndication services for angel investors. You can learn
more about our services on our web site.


Best Practices in Forming Investment Syndicates, I

Best Practices in Forming Investment Syndicates, II

Loon Creek
Loon Creek specializes in streamlined group investing services for angel investors. Formed in 2010 to address the needs of the local angel community, the company has grown to provide services to angel investors across the U.S. The Partners are active angel investors, and experts in the unique challenges of investing in early stage companies.
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