Sticking point in our Operating Agreement

[Robert Fabian]

My LLC is registered with the state, the finances are set and we are looking for our first property. We must first however get our Operating Agreement set. We have actually agreed on everything thus far. There is one sticking point though. The partner who is providing the capital for the initial flip or two is concerned about financial losses. I bring just about no capital to the deal. I am a contractor who is putting all else aside and providing sweat equity.

If the situtation occurs on flip number one where we lose $20k, he feels that he should make that money back off of the next flip before any compensation is distributed. Meaning that, if we make $30k on the next flip, he gets his $20k back first before we divy up the remaining $10k. Coming from the world of finance, he said that is how it is done in his industry.

My concern is that on a loss of $20k for him, I have turned down work and lost money, plus put in countless hours into a flip without pay. Now I am supposed to go work on another flip for pretty much nothing to help him recoop his financial loss?

Has anyone encountered a situation like this? If so, what is the common way to handle it?

Thanks!

[Bill Gulley]

It is common and customary. Treat the capital as a loan, if you got the money from the bank, wouldn't you have to pay the bank off before selling and conveying title? Yes, you would.

If you are losing money, it's not the source of funds that's the problem, it's the wrong deal or too much put in and related expenses. :)