Tax Question

I'm gussing these are working interests that you are investing in (as opposed to royalty interests?

Are your investors wanting to invest in specific wells? Or, do they want to invest in the LLC, which then invests in wells (and these investors may or may not have a say in which wells the money is invested).

Generally when someone invests in an LLC, their ownership interest is in the LLC, rather than the individual assets in the LLC. This is the main difference between using an LLC and using a co-ownership model, where each owner owns an undivided interest in an asset (commonly seen in real estate, but can apply to any number of types of assets).

However, when I worked in Houston, I had a client that had an LLC set up as you describe. The operating agreement of the LLC laid out that the money that each investor put in was allocated to specific percentages in specific underlying assets (in this case, working interest in O&G wells). They basically did a seperate P&L for each well, allocated the income/expense from each well to each member based on their underlying agreement, then added up the ones for each member to issue that member a Schedule K-1. There were about 10 different wells. It was not hard to do, but it was time consuming and we charged the client a nice amount in fees each year. I will also say that every member in this LLC was related to the others, it was 6 family members.

If you go down this road, make sure you get both an attorney and a CPA that are well versed in O&G. As I am sure you know, there are a lot of special provisions to O&G that you want some specialist help.