Can I seed the GP in a partnership with cash from my IRA?

[cman]

Does anyone on this board have any experience here?

 

Say I want to form a partnership with outside LPs, can I invest my existing cash from an IRA into the GP? 

Is this legal?  Are there any specific brokerages that either do or do not allow this?  Are there special custodial fees etc?

 

Also, does anyone have a rough estimate for the legal fees involved in getting a small time partnership up and running? 

 

Thanks!

[returnonmycapital]

I don't know anything about US tax law since I am Canadian.  But in Canada, if your partnership vehicle is a "registered investment" you can use tax deferred savings as capital in the vehicle.  In Canada, it is quite simple to apply for registered investment status with the Canada Revenue Agency and doesn't cost anything 'extra'.

 

Again, I don't know about legal issues and costs associated with starting a partnership vehicle in the US, but if it is anything like Canada, it can be done on a shoe-string. 

 

I refer to Canadian requirements and process:

 

First, securities commission registration.  For this, you need to have certain qualifications that the commission deems appropriate for managing other people's money professionally.  I think the CFA designation would be sufficient, for example.  But other qualifications, such as professional experience &/or other professional designations may do the trick.  If you apply for registration yourself, you don't pay any helper fees.  This was my route.  I think I paid a total of CAD1,300 to the securities commission for initial registration.  Annual fees are around CAD700.

 

Second, you need a partnership vehicle.  I chose a unit trust arrangement.  As I understand it, a unit trust offers a little more freedom in registration categories in Canada.  I'm not sure this is relevant in the US.  The total legal cost of setting up the trust was CAD1,500.

 

Third, I set up a management company to act as adviser to the partnership vehicle.  This was a simple incorporation and cost somewhere around CAD250.

 

Fourth, I contratcted an independent administrator to handle investor cash, back office admin., accounting (including tax), etc.  Initial cost for this arrangement, CAD4,000.  Ongoing cost 0.2% of net assets or less.

 

Fifth, audit.  This is a requirement for registration in Canada for the management company (adviser to the partnership vehicle).  Initial cost of opening balance sheet for the management company, CAD700.  Ongong cost is anyone's guess but mine is CAD4,000.

 

So, total initial set up costs come to CAD7,750 or so.  And ongoing operating expenses are somewhere in the neighbourhood of 0.25% of net assets per annum for a fund of less than CAD10 million (costs decline if assets grow over that figure).  Given the benefits of the partnership/fund route to both investor and manager, as I have highlighted in another post, it seems to me to be a small price to pay.

 

Other considerations, in Canada, are the need for a minimum amount of liquid capital within the management company (in Canada it is CAD25,000, adjusted for insurance deductibles) and the need for professional liability insurance, which may cost CAD3,000 per annum.

 

I hope these figures are a good ballpark for the US.  I am led to believe they may be a little under what is expected of budding managers there, but perhaps Parsad can offer his experience.  I believe he has a US set up.  Good luck to you!

[watsa_is_a_randian_hero]

you cannot invest money from an IRA in to a investment you control (your own company, your own primary residence, ect.).  I think that rules out seeding a GP, because a GP means you control the partnership.

[JEast]

I would double check the comment that you can not invest your IRA/401K in something you can control. There are actually several options available including setting up LLC for real estate investments, partnerships, etc. The paperwork is hell, but just do a web search.

 

 

Cheers

[NormR]

First, securities commission registration.  For this, you need to have certain qualifications that the commission deems appropriate for managing other people's money professionally.  I think the CFA designation would be sufficient, for example.

 

These days to get an IC license, in Ontario, a CFA is good for the educational requirement plus 5 years working for another asset manager.  The last item is the big problem for most.  But exceptions can be granted.

 

More importantly, the rules are due to change this Sept. and some of the new rules aren't friendly to new operations.  >:(

[returnonmycapital]

NormR, remember that the CFA designation only comes with at least 3 years of relevant professional experience.

[watsa_is_a_randian_hero]

I would double check the comment that you can not invest your IRA/401K in something you can control. There are actually several options available including setting up LLC for real estate investments, partnerships, etc. The paperwork is hell, but just do a web search.

 

 

Cheers

 

Well, I'll say this.  I'm positive you can't have an IRA own your primary residence.  I'm have a lesser degree of certainty, but am fairly sure, you cannot have an IRA own your personal business, if for example, you are a sole proprietor.  The reason is the IRS is trying to prevent transactions from not occurring on an arms-length basis.  

 

For example, if your IRA owned your home, you could lease it from the IRA and pay an above average lease rate.  This would essentially have the effect of allowing you to contribute additional funds to your IRA.  You could also sell it at a below market rate to the IRA, so the IRA has a nice gain sheilded from taxes.

 

It would be best to consult a tax expert though.

[bookie71]

It would be considered self dealing which is normally a no no.  You might be able to get permission, but the legal costs would probably be prohibitive. Be sure before you do it, that you spend some time with one of the pension, profit sharing  experts as it is an extremely complex area.

[netnet]

There are control issues and you are skating close to the line, but you can invest in an entity via an IRA.  You need to find a third party trustee, like Pensco in San Francisco.  The rules are a bit murky.  Basically, though you can not be (should not anyway) have control, if you have less than 50% and the other partners are not spouse, father, mother, or siblings, you can do it. You can put the IRA funds in the limited partner, that way you avoid the "unrelated business income" tax issue.  (now comes the customary, this is not advice to buy or sell, please consult your own tax advisor, blah, blah, blah.)