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Berkshire Hathaway Inc. Message Board

  • Novalis_97 Novalis_97 Aug 6, 1998 9:41 PM Flag

    partnership vs. corporation

    What do you think is a better investment vehicle,
    a partnership or corporation? Buffett's partnership
    was, as I understand it, a hedge fund (limited to 99
    "limited partners" at the time). Buffett would distribute
    100% of the the first 6% of profits to his partners
    but would take 25% of any profts above 6%. On the
    other hand, Buffett dissolved the partnership in 1969
    and continued his investing activity via Berkshire
    Hathaway, a corporation the partnership purchased in 1965.
    One difference between the partnership and
    corporation I see is that while parters are getting only 75%
    of profits above the first 6%, shareholders in a
    corporation get 100% of all profits. Buffett might prefer the
    corporate structure because it's more fair to his
    investors. Anyone know why in 1969 Buffett didn't start a
    new partnership, and why he decided a corporation was
    the way to go?

    SortNewest  |  Oldest  |  Most Replied Expand all replies
    • I agree, it's not every week that a major world power goes belly up just to provide a buying opportunity for savvy investors!!

      Beakman42

    • Let us not forget what Mr Buffett said, that we should all be gratefull for times like these, as this is when he does his best work - Picking under valued companies to invest in !

    • Thanks for your reply. I've done a lot of
      research in recent days, and your advice to get a good
      lawyer is wise advice.

      I'm thinking about both an
      LP and an LLC right now. Does the person who started
      an LLC necessarily have 100% voting rights as to the
      affairs of the LLC? I know that the General Partner of an
      LP need only invest a little of his own money in the
      LP to claim 100% voting rights over the LP (Buffett
      put in only $100 of his own money in his
      LP).

      Other than that, it just seems to me that most hedge
      funds these days (Buffett's partnership was a hedge
      fund) are structured as limited partnerships. (See
      http://www.azcentral.com/business/0823hedgefunds23.shtml;
      http://www.pathfinder.com/fortune/1998/980608/hed.html; http://www.hedgefunds.org/FAQ/faq.htm;
      http://www.vanhedge.com/what.html; http://www.sec.gov/consumer/invclub.htm; and
      http://www.vanhedge.com/investor.html) Like most hedge funds today, Buffett's LP escaped
      SEC registration as an "investment company" because
      it did both of the following: 1) limit itself to 100
      members and 2) did not make a public offering (advertise
      for investors). In addition, Buffett did not have to
      register his LP interests themselves as securities with
      the SEC because they were a non-public
      offering.

      As I see it, the issues are as follows:

      1)
      Are the LP (or LLC) interests "securities" under
      federal law? -- No, if they are a non-public
      offering.

      2) Are the LP (or LLC) interests "securities" under
      state law? -- In Ohio, LLC interests are not securities
      as long as you sell them to no more than 10
      investors. On the other hand, LP interests are securities,
      and registration (costs $50) allows you to sell them
      to up to 35 "non-accredited" investors and to 65
      "accredited" investors (general partner himself counts as 1
      accredited investor).


      3) Is the LP (or LLC) an
      "investment company" under federal law? -- No, if a) the LP
      has no more than 100 members and b) it doesn't make a
      public offering (advertise for investors).

      4) Is
      the LP (or LLC) an "investment company" under state
      law? -- I don't know about this yet; there may be
      "notice filing" requirements.


      5) Does the
      General Partner of an LP (or equivalent in an LLC) have
      to register as a "dealer" under federal law? -- I
      don't know about this yet.

      6) Does the General
      Partner of an LP (or equivalent in an LLC) have to
      register as a "dealer" under state law? -- In Ohio,
      no.


      7) Does the General Partner of an LP (or equivalent
      in an LLC) have to register as a "salesperson" under
      federal law? -- I don't know about this yet.

      8)
      Does the General Partner of an LP (or equivalent in an
      LLC) have to register as a "salesperson" under state
      law? -- In Ohio, yes if LP, no if LLC (and 10 or fewer
      investors)


      9) Does the General Partner of an LP (or equivalent
      in an LLC) have to register as an "investment
      adviser" under federal law? -- No, according to
      http://www.hedgefunds.org/FAQ/adviser.htm

      10) Does the General Partner of an LP (or equivalent
      in an LLC) have to register as an "investment
      adviser" under state law? -- In Ohio, yes (upon enactment
      of proposed investment adviser law, which is likely
      to pass).


      11) Under federal law, can the
      General Partner of an LP (or equivalent in an LLC) charge
      a performance-based fee (i.e., 20-25% of profits
      above specific hurdle percentage)? Yes, but only if all
      investors are accredited.

      12) Under state law, can
      the General Partner of an LP (o

    • Sorry I took so long to respond, I've been on
      vacation.

      The conditions for limited partnership
      exempt status are similar to an LLC, as far as I know.
      If investors contribute more than $1 million in any
      one year or the fund reaches $5 million total, if you
      have out of state investors, or if you have too many
      investors (I think 35 is the cutoff for exempt status), you
      need to file with the SEC. I'm not a lawyer, though
      (or I'd have to shoot myself) so don't take my word
      for it. Go see someone who knows more than I do about
      legal matters. It will be money well spent. Not seeing
      a lawyer before starting a partnership could turn
      out to be the most expensive money you ever thought
      you were saving. The only hard part is finding an
      attorney who is experienced in equity investment
      partnerships, since those are relatively rare compared with
      other types of partnerships/LLC's.
      For example, I
      had numerous "experts" (i.e. lawyers who didn't
      specialize in investment company partnerships) tell me I had
      to get my series 6 and series 7 broker licenses like
      a stockbroker before I could manage an investment
      fund. All of them were of course wrong, and luckily I
      had done some reading and knew that they were wrong.
      Finally, I found a guy who knew what he was talking
      about.

      Just curious, why start a partnership instead of an
      LLC? You're personally liable for damages if the
      partnership is ever sued or you make some really bad
      investments. With an LLC (like a corporation), you aren't
      liable for anything unless you're blatantly negligent.

    • registration does not hinge on the corporate
      structure of the entity, but on the nature of the
      investment vehicle being sold or offered for sale. llc
      interests can and usually do qualify as securities under
      the sec rules and must be registered or exempt from
      registration for sale. there are several partnerships that
      trade publicly, like oppenheimer, I believe.

    • Couldn't help but notice how well RDC is holding up - hehe.

    • I remember an article in the WSJ not long ago
      that said the number of investors in limited
      partnerships was increased from 99 to 500, and this was one of
      the big reasons why there has been an explosion of
      hedge funds recently.

    • to date, you're the strongest proof the
      evolutionists have that man came from monkey. And I don't have
      to resort to filthy language to "lace your shoes all
      the way to the top." You can't win in a battle of
      wits with me--not because I'm that smart, but simply
      because you're that dumb. Now why don't you get back on
      that keyboard of yours, which just "happened" one day
      (atheist fool!) and fire me back a nice filthy message.
      Every time you open your cyber mouth, you reveal a
      little more of your ignorance. But I shall do my best to
      be civil to you for the next few days in recognition
      of "Be Kind to Dumb Animals Week." Hehehehehehe. ljh

    • For god sakes neither do I. You got the last word even though you're wrong.

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