Business Structure of LLC and partners

22 Replies

Advice would be appreciated. I am funding a partnership with an "Operating" partner. His LLC will be the "GP" general partner with my LLC as the limited partner. He is coming in with NO capital but as the operating/Property management/Construction partner. He will provide all the due diligence, acquisition, rehab, and property management of all acquisitions. He will get small percentages for construction and property management throughout the term of ownership of the properties. As well as 50/50 equity share. In essence, I am simply the passive investor with 50% equity. I will finance and determine exit strategies of ALL properties. Should I allow these terms? should I come into this agreement as the "Limited partner? Should i suggest a different LLC set up to protect my interests more?

Thank you in advance!

@Paul LaSpina

I think it depends on the level of trust you two have, how the voting power is divvied up, & whether or not YOU feel a 50/50 split is fair.

We syndicate large multifamily apartment communities & typically raise over 1MM from our passive limited equity partners.  We typically give 70% to 80% of the cash flow, tax benefits, & profit to them. If the Deal allows for it... We do have small, industry standard, fees (acquisition, asset mngt, & possibly a capital transaction) built in for qualifying for the loan, having the track record, managing the business, finding the opportunity, etc...

Again I think it depends on how YOU feel about the terms & your relationship with your partner.

I hope this helps!

To Your Wealth,

Dino 

@Dino Pierce Hey Dino, Thanks for that.... How do you structure the companies? is it just a single LLC?

Originally posted by @Paul LaSpina :

@Dino Pierce Hey Dino, Thanks for that.... How do you structure the companies? is it just a single LLC?

1 Main LLC to purchase the asset.

Then there’s A & B shares.

Each investor uses their own LLC to invest so ultimately it's multip LLCs.

Hopefully that helps.

Dino

@Paul LaSpina

The first question you should ask yourself is if you can invest in the partnership directly or if you need to invest in it through as an LLC.

You are already investing as a limited partner. Therefore - your liability should be limited to the amount that you contribute to the partnership/LLC.


Whether you feel 50% is fair or if you should be entitled to more depends on what each person is bringing to the table and what his/her level of experience is.

The more experience a person has the more leverage he/she has to demand a higher percentage of the profits.
A general contractor/property manager with 20+years of experience likely has more leverage than a contractor who is just starting out.

It also depends on what you require as a rate of return. If you are putting $100,000 and you are only getting $5000 a year; that return is only 5%. Do you prefer your returns to be higher than 5%?

@Basit Siddiqi Wow, Great stuff !! thanks. So you are saying that I really don't need to engage with the General partners LLC with my LLC ? I can simply just use my name as the limited partner with my only exposure being the amount I invest correct? What about the distributions, it doesn't make a tax difference if I am myself or the my LLC?

Hey, I'm in Manhattan. I would love to buy you a cup of coffee or a drink and pick your brain a bit? who knows maybe there are some deals out there where we can help each other out?

Please let me know if you'd be interested in talking RE?

@Paul LaSpina

A limited Partner in a Limited Partnership should be afforded limited liability(up to contributions to partnership).

As a limited partner in an LP - you are not allowed to engage in the day to day activities of the limited partnership. Doing otherwise may lose the limited liability protection afforded to you by the entity.

I am not an attorney so you may want to seek confirmation from one.

You are normally taxed on what the partnership earns during the year(not necessarily on whether or not you had some distributions). Distributions are only taxable if you received money back over what your basis in the partnership is.


Let me know if you attend a local real estate networking event. We can have a chat/drink then. Otherwise - I am open to answering any questions you have via direct message.

@Basit Siddiqi Thanks again. I don't currently attend any events but have been looking into some on meetup.com............. I will be having some input on the daily activities of the partnership especially the property investments in regards to deal analyzing , negotiations, exit strategies etc... so maybe in would be better for me to enter the partnership as the sole owner of my LLC?

@Paul LaSpina Great advice offered here. Let me add that in most private markets, there are no standardized deal structures or terms. 

The deal can be structured in any way, as long as all parties agree to the terms. In your particular case, if there are only 2 parties, you could, potentially, be best served by having a partnership (as opposed to the typical GP/LP structure). 

Apart from the profit split (50/50 as you've mentioned), you should really focus on who has effective operational control i.e. who has the decision-making power. That will make or break this partnership.

@Omar Khan

Understood about the "Operational Agreement". That will be very clear. As far as the GP/LP scenario, your thought is to simply create a new "partnership" entity?

@Paul LaSpina Obviously consult with your attorney/CPA, but if there are only 2 parties you'll waste a lot of money, time and resources going the syndication (GP/LP) route. 

Save yourself the hassle and try to form a partnership (the terms and conditions can be anything you decide).

I love this thread. I’ve read a lot about being cautious in a partnership but I like the flexibility and it seems like a great way to accelerate growth by collaborating with others.

@Paul LaSpina The amount of money it will take you to hire a competent securities attorney and other professionals (CPA, etc) will far surpass your needs (assuming this is just 2-3 people). 

You do need an attorney, just not a securities attorney who will charge an arm and a leg. Similarly you need other professionals, just not the same ones (or at the same rate) that syndicators will be paying (because dealing with securities is a specialized body of knowledge)

@Omar Khan

If I am "Fronting" a small amount of $$ to be the "capital" guy with a "partner" to buy 1 MFH. The LLC will be set up as Him as the "General Partner" in the new LLC and me as the "Limited Partner" in the new LLC, He will provide all the operational parts of the partner agreement and I will simply just provide a small amount of $$ as the "limited" partner, although I will still be marketing for deals and analyzing deals. For this arrangement we will both share 50/50 any flip or rental profits. Eventually, if successful profits will be used to continue to purchase additional properties with the same arrangement.

Are you saying with this structure we would be considered a "Syndication" and would need to abide by SEC rules?

@Paul LaSpina I am saying that unless he takes on ALL responsibility when it comes to signing off on debt, you have no GP/LP structure. Furthermore, when you go down this structure of GP/LP you will be unnecessarily complicating your deal (i.e. more headaches and more money going out of the door to pay for professionals). 

It doesn't matter if you are fronting him the cash or not. What matters is that you are 2 people with clearly delineated duties. You can simply form a partnership and buy umbrella insurance. It will save you time, hassle and money. 

@Omar Khan

OK, if he's Good with "Signing off" on ALL debt incurred by this LLC then this structure is fine ? or, don't even bother with any LLC's ? form a "partnership" with Umbrella ins ?

How is a "partnership" formed for these purposes?

@Paul LaSpina Best bet: consult with a competent CPA. 

Nonetheless, going by your post only, the most efficient structure for you is the partnership structure. You can still be a limited partner with the insurance providing an extra layer of coverage. Your partnership/operating agreement can spell out the terms and conditions. 

@Paul LaSpina

I think there is some confusion in this thread because of the incorrect use of certain terms.

LLC is a limited liability company and the owners of the LLC are called members. Members who are active in the LLC are called Managing-Members. There are no partners in an LLC. Therefore the use of "limited partner" and "general partner" makes things confusing.

A limited partnership is a partnership where one partner within the limited partnership has to be a general partner. The general Partner will take on all liabilities in the case the partnership gets sued. Limited Partners are those who are not active and can only lose what they contributed to the partnership. There are no members in a limited partnership.

Furthermore - you can't be a limited partner if you are providing day to day input.

Syndication - There are many definitions of syndication but most people think of it when you are looking to obtain capital from private investors. This may require compliance with SEC laws.

Originally posted by @Paul LaSpina :

@Omar Khan

If I am "Fronting" a small amount of $$ to be the "capital" guy with a "partner" to buy 1 MFH. The LLC will be set up as Him as the "General Partner" in the new LLC and me as the "Limited Partner" in the new LLC, He will provide all the operational parts of the partner agreement and I will simply just provide a small amount of $$ as the "limited" partner, although I will still be marketing for deals and analyzing deals. For this arrangement we will both share 50/50 any flip or rental profits. Eventually, if successful profits will be used to continue to purchase additional properties with the same arrangement.

Are you saying with this structure we would be considered a "Syndication" and would need to abide by SEC rules?

 Paul,

I think the confusion comes because you are stating that you will be the "money" guy and a Limited Partner in the deals which typically means you are 100% passive and are relying on your General Partner to operate the property, do asset management, secure debt, etc. Under that structure you would be regulated by the SEC and the whole deal should be structured accordingly.

If you are planning on having some level of active involvement in the operations and not completely relying on someone (The GP in this case) to manage your capital with the expectation of future financial return on your invested capital then you can go ahead and just go the "partnership" route. This would be to simply create an LLC where you and your partner are 50/50 members (if you think is fair) and lay the structure, responsibilities, etc out in the operating agreement.

Consult all of this with your CPA and your Attorney, since I'm not qualified to offer legal or tax advice.

That being said, that 50/50 split will ultimately depend on how much value is each of you bringing to the table. For your reference, on our deals we do the following:

We bring accredited investors as Limited Partners under a syndication model. Their participation is 100% passive, and we offer them a preferred return (we don't see a dime out of cash flow until their pref return is met), a 70/30 - 80/20 split on their favor after that, and typically the same split on every capital event. We also charge 2% acquisition fee and 2% asset management fee.

I hope this helps. Good luck!

Hey, wait a minute. Not all securities attorneys charge "an arm and a leg". One is usually sufficient. (-;  

I can't speak for others, but a good securities attorney will help you figure out the cheapest and most practical way to do your deal and then offer you services that meet your needs, versus trying to jack the services to the highest fee, regardless of what the client needs. Just sayin...

Hey Paul, it sounds to me like the responsibility of the legal agreement should fall on the GP and then you should be sure that it protects you sufficiently. Do you have any voting rights at all? Demand for money? Tag along/drag along? Distribution preferences? Return of capital rights? Is the fee structure equitable?

Let’s say hypothetically I were to buy in to a real estate brokerage as a partner - would the easiest thing to do be to set up an LLC and have the two members be 50/50 partners? I guess I got a little confused in the terminology between “members” and “Partners” in an LLC.

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