What type of partnership should we form?

Question

My brother (Rez) has a real estate investment company with a partner of his (Sam) which basically bought multi-family units and condos, repaired and rented them out. Income is earned from the rents. They own 13 units at the moment. I own 4 units. We want to form a partnership that benefits all three of us and allows us to raise money ($2 million) perhaps in the form of an equity fund. However, my brother wants to play a limited partner role, so Sam and I will be playing the general partner roles. Sam has a full time job and will help part-time. I have time and can make this my full-time job if the pay is at least $5,000 a month. What type of partnership should we form so that our interests are aligned and different roles and amount of responsibility is recognized? Do you know who can answer such a question?

Alina Trigub · Answer

@Matt N. It takes a bit of research but there're plenty of posts on BP and outside of it about various business structures. Here's one example:

https://www.investopedia.com/terms/d/debtfinancing.asp

The same applies to finding an attorney, look through old posts to find either attorneys or local investors to ask for recommendations.

John Drowns · Answer

Good advice above.  I would also suggest setting up an LLC or multiple depending on if you want to hold each property under a different LLC.

Sean Morrison · Answer

@Alina Trigub makes a good point about the passive investor being a securities sale. However, that is not a difficult hurdle. You will need to make sure to file for an exemption with the SEC and follow some rules on advertising and other things. A debt structure would avoid that though. I notice that you did not mention forming a corporate entity. If you do a partnership, you and your general partner will be personally liable for any debts or liabilities arising from the business. Have you looked into an LLC?

Matt N. · Answer

Thanks @Alina Trigub. If you could give me a link to some material that explains a few different structures I think I will get a better sense. As a matter of fact I’m looking for a good experienced real estate attorney in Maryland Virginia area.

Alina Trigub · Answer

@Matt N.

If you will have at least one passive investor, you're in the business of selling a security. Consider making your brother a debt partner. Note, these just suggestions. A real estate attorney will be best to advise on the proper structure.

What type of partnership should we form?

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