5 Member, One Time Development Deal: Partnership or LLC?

3 Replies

Hey everyone! It is an honor to officially join the BP community. 

My situation is a bit complicated. I and 4 friends are joining forces to build a duplex (or two separate units) in one parcel from the ground up. One unit would be sold to one friend at cost, and he has offered to fund 50% of the deal. Since we anticipate obtaining a construction loan, he would provide the 20% down of half the loan (for example, if loan is $500k, he has $50k in cash). The other unit would be sold to the public with the profits split equally 5 ways. We anticipate equal ownership as well.

One member/partner is an agent, I dabble in real estate investing, and the other three are quite successful in their day jobs. If things go well, we'd like to continue doing deals, but I consider this to be the only deal with the same 5 individuals to get our feet wet. After that the dynamics will likely change as 5 partners is quite cumbersome. We project wrapping up the deal in 6 months or so.

Thus, my primary question is how we should structure the entity. Should we form a general partnership and apply for the loan as such? The other typical contender is an LLC, but maintaining that entity is expensive. Plus, we don't need liability covered after the units sell, right?

Any insight you have is greatly appreciated! Some day I'll pay it forward *when* I am a successful investor!

I really see the only option as an LLC. Especially with multiple members. LLC's are fairly easy to set up and will more easily allow you to setup an operating agreement to make sure all members agree to the terms

Yes an LLC has some costs to maintain and will be harder to get financing but the liability risk of a partnerships is something I would definitely stay away from. You are personally responsible for anything your partners do.

Maintaining an entity for less that a year is not that expensive.  If that effects your deal you have a lousy deal.

Thanks, gentlemen. You make great points and have convinced me. LLC, it is!

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