Updated: January 04, 2021, for the 2021 tax and K-1 season.
Once a year, inquisitive real estate syndicators wonder; ‘How else could we distribute K-1s to our investors?’ or ‘Is it legal to send these via email?’ So we chatted with some of our customers to bring you the most popular methods, their benefits and drawbacks, and how to use these methods while remaining sensitive to data security issues.
What are common methods for sending K-1s to investors and shareholders?
There are four common methods that sponsors use to distribute K-1s to their investors: mail, email, file sharing tools (such as dropbox) and specialized investment management software (such as Groundbreaker). Here is how each method works and how you should be using them.
Mailing your tax forms is simple and safe! Outside of hand delivering the K-1s, it is likely the best alternative to keeping personally identifiable information safe. No need to password protect any files (how could you?) or redact information. Mail deliverability is reliable, and safe since opening someone else’s mail is illegal in the United States.
Simple doesn’t mean effortless though! The digital methods covered next will avoid printing, sealing envelopes, and getting them to the post office. Another issue with sending documents by mail is that investors often have multiple residences or business addresses and your data may not reflect the investors’ current preference. Lost mail needs to be resent, which can be labor intensive and make investors nervous that there is a lost envelope with personally identifiable information. Mail can also be damaged, and even sent back to the original sender in case of deliver-ability issues.
How to do it right:
As mentioned, this is the safest option and pretty straight forward, but it is also the most inconvenient. If you still choose to mail the files, it is a good idea to use a delivery or signature confirmation service, and of course, get tracking. It may be inconvenient to be home when the mail arrives, but in the current work from home environment this may be less of a concern. You could also send to a commercial/office address if your LP is actually going to the office at this time. You may also want to check in with your investors, via email, if they would prefer to make any updates to their mailing address. Another suggestion is to have all of the data (names and addresses) in a document that can easily be shared with an assistant to take this task off your plate. Your virtual assistant is probably not going to help you here, you should only hand this task off to your most trusted in-office assistant and colleagues.
Email is definitely a convenient way to send someone tax forms. There are other online methods, but virtually everyone has an email address. If you are looking to send out multiple forms to individuals and have them arrive immediately, there’s email.
Security and privacy issues! There are clear risks when sending K-1s by email. Unless you take the necessary precautions beforehand (shared with you below), any network can see the contents of the email and the attachments included. This would lead to an exposure of personally identifiable information such as social security numbers, home addresses, and names. By taking the right steps, you can protect all this information and still have the convenience of email.
Another issue is that often times email passwords are eventually exposed online, (Check if your email’s credentials have been exposed) and that K-1 file you attached is likely still in that inbox with no way for you to take it down.
Finally, you have to send emails individually, one by one, to each investor, which is also time consuming and error prone.
How to do it right:
There are a few steps you need to take in order to secure the content for email. First the document must be scanned as a PDF. That PDF file can then be password protected. Find out how password protect PDF files with these step-by-step instructions. Additionally, you should never send any information you want to be kept private in plain text. Meaning even with password protected files, it is best to redact any personally identifiable information. Here are instructions on redacting sensitive information. Once that is done, the last step before you can securely send the documents via email is to delete the hidden data that still lived behind the redaction bars. This all may seem like a lot of work, but emailing K-1s is probably the most common method and it’s scary that some sponsors out there are not following these best practices. Before emailing, it is imperative that these precautions are taken care of. Once they are, feel free to email away!
Dropbox or other file sharing systems
Dropbox or other file sharing systems have similar advantages to sending something over email. It is convenient and quick for everyone. However, a key difference between using file sharing systems and email is the control over a document after you send it. As mentioned above, emails can get lost in someone’s inbox and they stay there (or in a spam folder) forever. However, with file sharing systems, manual viewing deadlines can be set. After that deadline has passed, you can remove the files from the system and your LPs will appreciate you for doing that.
Contrary to email, not everyone has an account on a file sharing tool. Your investors will need to create accounts with (gasp) an email address. For users who don’t have an account yet, they will receive an invitation to access the file sharing folders via those emails.
When sending documents over a file sharing tool, you may still want to take the same precautions that you would have taken for sending via email. That means password protecting the documents, redacting sensitive information, and deleting the hidden data.
How to do it right:
In addition to the sensitive information scrubbing covered in the email section above, follow these steps. Create an account with dropbox or your preferred tool. Create folders for each investor and upload the files to the individual folder. Share the folders one to one using the tool’s email invitation functionality. Each folder being shared only with the appropriate parties. Inform your investors via email (a bulk email is fine) that the K-1 files will be taken down after a determined period of time, and set a reminder to follow through.
Investment management specialized software
This is the fastest method by far. Depending on your portal provider, you’ll simply drag and drop one or many K-1s to the investor portal and the system (and/or the Customer Success Team) will do the rest, matching each in their corresponding investor account. The system then organizes the documents by investment for your investors. In one email investors can get an alert that a new K-1 (or any other document) is available on their portal. Software specialized for investment management is also the safest method. Documents are not attached in email and reputable platforms use bank-level data security since they’re dealing with PII.
Your investor portal can be one of the most secure locations for these files, especially if you enable 2-factor authentication (that text message you get when you login to secure accounts like your banking)
This is also a great branding opportunity and a way to engage your investors when making K-1 distribution and storage easier and more secure for both you and your investors. While your investors are accessing their K-1s, they can appreciate their portfolio performance through visually appealing tables and charts, access other files, and browse new offerings in your pipeline that are seeking capital.
Investment management software does secure and automated file sharing very well, but that is not the only functionality provided. So these systems can take a couple of weeks upfront to onboard and deploy, generally require a larger investment than the simple file sharing systems.
How to do it right:
I’m a little biased but… if you don’t already have Groundbreaker, the first step would be to schedule our product demo here!
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