Structuring a Parnership with Family

[Laurie Snyder]

Getting ready to purchase a deal with family and looking for some advice on structuring. Property would be a short term rental/event venue with historic significance to the community and a great location. One family member has cash to invest, but doesn't want to deal with it otherwise. My sister and her husband would like to partner with my husband and myself on actually fixing, maintaining and running the business. We would need to either combine our separate lines of credit or get a commercial loan to cover 75% of the deal + renovations, holding costs and cap ex fund. We are thinking of creating an LLC for this venture and any others we may want to take on together in the future if things go well. Any advice on the best way to structure with 2 active partners and 1 silent? We have only ever used single member LLCs for our own deals. Thanks in advance!

[Chris Seveney]

@Laurie Snyder

My recommendation would be to get a local attorney to sit down with all of you and have you all explain your roles and have the attorney put together the Entity and more importantly the operating agreement. Make sure to play out worst case scenarios like renovation costs exceed budgets, income is significantly less and money is needed to pay mortgage. It’s good to have all of that defined upfront so there are no surprises later.

Also Depending on if you manage something and take a salary also can depend on structure.

FYI this is Not tax or legal advice

[H. Jack Miller]

There are a lot of issues here. The first and most important is I would think 10 times before doing this with friends and or family. A lot can go wrong and does all of the time with an investment properties and even if its a finical home run, things can go wrong with all partnerships let alone family ones. Everything is always great in the beginning, but as things happen its easy to go off the road fast and hard.

Having said that and I would caution against it. Make sure everything is in writing, make sure everyone has the same short and long term goals, I would also have buys outs and capital calls worked out and part of the agreement in writing.  

Where is a lot to deal with example is everyone going to be a guarantor on the debt, most lenders want owners of 20% or more to be guarantors of the debt.

As far as the economics that's the easy part. Maybe do a preferred of around 9% and a split between the working partners and non working ones. Could be 50/50 or 70/30 or what ever anyone agrees to.

[Charlie Massey]

I would just make sure to have everything in writing beforehand. Make sure your attorney includes examples of things that could go wrong and how things would be split if something did happen