What is a ‘Pass-through’ Entity?
When you participate in an SPV, that SPV is an LLC treated as a partnership. When an entity elects to be treated as a partnership it means that all income, expense and credit items ‘pass-through’ to the members of the LLC. Each member then reports these items on their tax returns. ‘Pass-through’ items are communicated to LLC members by IRS Schedule K-1 and, if applicable, K-3 and state equivalent forms.
LLCs most commonly elect to be treated as partnerships. Other entities are partnerships by default (General and limited partnerships). S-Corps, although not partnerships are also ‘pass-through’ entities.
If an SPV in which you participate, invests in an entity that is itself a ‘pass-through’ entity, then the SPV must first receive a K-1 from the target company and incorporate the information therein before it can produce K-1s for you.
How do I know if the SPV’s target company is a ‘pass-through’ entity?
- Log into app.sydecar.io, click on ‘Closed Deals’ under the ‘Invest’ heading
- Click on the relevant investment.
- Look at the ‘Security Type’ under ‘Round Details’
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If the Security Type is LLC interests, or LP interests, then it is most likely a passthrough entity that will receive a K-1 each year. Because the SPV must rely on other parties for the K-1, there can be no guarantee that it will be received in time to distribute final K-1s to you by March 15th. Therefore most SPVs in which the target is a passthrough entity will be put on extension. This extends the due date of the SPV return to September 15th allowing more time for the target entity to provide the K-1 and for us to incorporate it into the SPV’s tax return.