Know Your Real Estate Partnerships: General and Limited Partnerships Explained

by | BiggerPockets.com

[Disclaimer: This is designed to provide general information regarding the subject matter covered. It is not intended to serve as legal or financial advice related to individual situations. Consult with your own attorney and/or other advisor regarding your specific situation.]

Do you need a legal partnership or LLC for your real estate investing business? Which kind is best for asset protection?

Lately on BiggerPockets, I’ve been receiving tons of partnership questions in both my inbox and on the forums. And for me in particular, since I frequently write about LLCs and the series LLC, I’m often asked, “How do partnerships go with these structures?”

So let’s clear up some of the confusion around partnerships and LLCs.

Coordinating the Use of Series LLCs and Partnerships in Real Estate

There are two basic types of legal partnerships. The general partnership shares all liabilities between partners. These partnerships have a logical place in certain situations, such as when a Canadian investor owns property in the U.S. But I don’t tend to recommend them for asset protection, particularly not alone.

By contrast, the limited partnership does limit liability for the partners involved. For this reason, it’s more effective. But because these partnerships limit liability, there must be a general partner as well to assume the liabilities of both partners. I recommend establishing an LLC as the general partner for additional protection.

closeup of hands clasped shielding cookie cutter in shape of house

Now, if you are wondering the best way to structure partnerships for asset protection because you’re beginning to design your legal strategy, I highly recommend you stop and ask yourself what your motivations are for wanting a partnership.

If they have anything to do with asset protection, streamlining your business, or solidifying your relationship, you may consider whether an LLC would be better as a complement or a substitute for the partnership.

While only your lawyer can give you the best answer, the information below should help.

Related: 3 Benefits of Holding Your Properties in an LLC

How the Series LLC Can Replace a Partnership for Your Investing Plan

If you’re considering a series LLC, you might be pleased to learn this entity can actually eliminate the need for a formal legal partnership. If you aren’t familiar with this entity, learn more about the series LLC option, especially if you have or plan to acquire multiple properties.

The series LLC’s parent-child structure is crucial to coordinating with partners. You may recall that the series LLC has a parent company that may have as many children, or series, as you have assets.

Since each series is essentially a mini-LLC, you can actually have different operating agreements for each series that specify your partners and their roles by asset. This allows you to build your strategy around the investment itself rather than the relationship with your partner. Arguably, the latter is easier to damage and harder to fix.

Different partners at the child level enable investors to work with different partners on each series. If you put your partner on your parent series or start an LLC with them, you’re “married” for the purposes of that entity. If something happens between you and that partner, you’d need an entirely new entity (if you’re seeing dollar signs, that’s because you’ll also be paying legal fees) to be free of them.

Not so with the series LLC. With the series LLC, your partner is only as involved with each asset as the agreement you both reach specifies. You’re also free to create new series with different partners at any time.

Creating a series is inexpensive, quick, and free of filing fees. Creating a new entity isn’t just costly, it also takes longer—as does dissolving an old one.

Related: Should You Put Your Rental Properties in an LLC?

Bottom Line: Consider a Series LLC Over Partnership

Frankly, the series LLC is the smartest option for most cases. Coordinating your partners through this entity is easier, offers greater protection than a limited or general partnership, and gives you greater control.

Perhaps most importantly, series LLCs offer stronger asset protection options. Whether you fortify your structure with trusts or a shell company, you can use this entity to set yourself and your partners up with a top-notch asset protection system that protects everyone involved.

[Disclaimer: This is designed to provide general information regarding the subject matter covered. It is not intended to serve as legal or financial advice related to individual situations. Consult with your own attorney and/or other advisor regarding your specific situation.]

Do you have further questions about series LLCs or any other types of partnership structures? 

Ask me in the comment section!

 

About Author

Scott Smith

Scott Royal Smith is a real estate asset protection attorney based in Austin, TX. His firm, Royal Legal Solutions, designs asset protection strategies exclusively for real estate investors. As an investor himself, Scott is sensitive to the needs of real estate investors; as an attorney, he maintains a working knowledge of the best legal strategies available for preventing lawsuits. Connect with Scott here on BiggerPockets or visit his website, www.royallegalsolutions.com, for more information about asset protection for real estate investors. Check out all of Scott’s previous work for BiggerPockets here.

3 Comments

  1. Christopher Smith

    It’s my understanding that CA charges a separate franchise tax minimum levy of ($800) for each LLC in the series regardless of how many LLCs make up the series, not just one such tax for the “parent” LLC of the series which would cover all members of the series.

    Is this true?

  2. Ryan S.

    Hey Scott, great read! We are looking to start our first partnership and our attorney advised us not to set up our partnership as a series under my current parent LLC because he said that the tax would ultimately fall on me come tax time, so he recommended setting up a separate LLC for the property that would hold the property in. Can you shed any insight on that? Thanks for the article!

    Ryan

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