Looking for Template for starting an investment group...

12 Replies

I am creating an investment group with several friends, who do not know each other. Our plan is to purchase and flip homes in our local market. We are creating an LLC, and I wanted to find out if anyone has done this (an LLC with people who aren't familiar with each other) and could recommend some best practices for forming the group and any essential language for our operating agreement. If you have a group like this, how are management roles handled, how are profits handled (do you distribute all the profits after each deal OR are the members required to re-invest a portion), how are new members added, and what if someone wants out? Any guidance would be appreciated.

@Kiesha Curtis

Well, I think the specifics that you are looking for are going to be State-specific, and really should come from the counsel of a qualified attorney.  But, let give you some "hints."

We've had many discussion threads about partnering where one person does the "leg work" and the other bring the cash.  In short, the person who brings the cash should get the profit.  the person doing the leg work is really just doing a job so will be paid as such.  Investors make a profit on the completion of the transaction after all the expenses are accoutned for.  If somebody wants to take some sort of percentage wthout putting up capital and expect to be compensated no matter which way the deal goes, then they aren't an investor.

The attorney should advise you to make sure the roles are such that there is some sort of tie breaker...

If you really want... One slightly more complicated way to do this is to create a LLC for each deal, which you ahve indicated are all short term. Its normally to do this. Many times the LLC is named the street address of the property to make it easier to keep track. This makes your "re-investure" question moot since after the deal, everybody gets their principal and profit (thats the idea anyway) back. Then, you go after your next deal. If you are concerned about branding, you could also each create your own single member LLC's, then form the multi-member LLC's with your personal llc's as the member / owners. In either case, making a new LLC for each deal allows for flexibility. For example, what if one person doesn't want to do that deal, for whatever reason. Maybe your group wants to make a different split because they have differing amounts of capital to put up... etc. The point being, you can customize the Operating Agreement to each deal. In this way, you don't have to necessarily figure out every detail upfront or have to keep creating amendments.

Depending on your finances, I assume people will want to take draws so that they have some cash to pay their taxes.  Unless you form a C Corp or elect C Corp status (both generally not advisable), you will have a pass through entity so the tax on your cut of the profit/loss will be calculated on your personal 1040 tax return.  

I hope this helps.  I'd be happy to chat.  Good luck.

This sounds like a bad idea...

A business(LLC, LP, any entity) is like a marriage where it is difficult to get out of once it is created.

You are asking people to trust in others who don't know who the others are and don't know the strengths/weaknesses of others.

I think it is okay to have limited partners / non-managing members join an entity and they don't know each other. It won't matter in this case since they don't have any responsibilities.

If you want your situation to work, I would consider inviting everyone to a group dinner, discuss the arrangement and see if they are on board.

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@David M. Great question!  All are friends/acquaintances of mine but do not all know each other.  We have an attorney involved, and she's been incredibly helpful.  But I wanted to reach out to a few people who are hands-on investors to see if there's anything that we might be missing.

Your advice is VERY helpful. Our attorney suggested a series LLC, but we'd put that conversation to the side. After reading your comments, I think we'll revisit that.

@Basit Siddiqi Thanks for your feedback as well. I will bring this up to the attorney also, in order to get a better understanding of the pros/cons. I think we started with the LLC idea because that's what everyone is most familiar with, which is not a good reason. It sounds like it may not be the best option necessarily.

@Kiesha Curtis

To piggyback on @Basit Siddiqi , first figure out everybody's comfort level with each other. Furthermore, what is your point of bringing your friends together? Do they have skills/time to put into this effort? Or, do you really want their capital? If its the latter, then as an example you could consider them as true "investors." They put up so much capital to your LLC and in return you give them a Note. Basically, they are loaning you money. Just becareful as once you "scale" this idea, I THINK you can run afoul of the Security and Exchange Commission (SEC) since it becomes a syndication or some sort of regulated investment product. I really don't know, but just read stuff here and there on BP.

However, I think the aforementioned idea of having limited partners / non-managing members is much cleaner.  But, the above gives you an idea of one way to go.  I am guessing in the LP method, they would get a share of the profit, if any.

I guess you are in one of the few States with series LLC. One issue I've read is since they are pretty new ("just a few decades"), there is limited case history on them. The application of their limited liability is untested/proven. While the operating mechanics might be different, it would give you something similar to the nested LLC I was suggesting earlier. My understanding with the Series LLC is it alleviates the need to get a bank account for each sub-LLC and basically going through the complete process of forming a LLC.

Oh, and Siddiqi's idea still works with a LLC. His point, as I understand it, is that not everybody needs to be some sort of "full/active Member" (N.B. owners of a LLC are called Members). A multi-member LLC really looks / operates like a partnership. So, maybe if you Googled that it would give you some ideas.

One more piece of advice.  For the first deal.  Don't go too grandiose, if at all, with your plans.  Get something to protect yourselves and then do a deal.  See if this system works for all/some.  Are you even able to make money?  Well, you may not the first time around but will people get discouraged?  Maybe after a couple a deals you find that its working great.  Honestly, I personally, as a layman, don't see why you could dissolve the entity you created and start with a new one structured with the bells and whistles of what you want?  Or, you modify what you have existing...  In short, as with starting any new company, don't go crazy and incur "exorbitant expenses" (unless you are so sure it will take off).

Good luck.

@David M.

Thanks for the GREAT suggestions.  I'm in TX, where series LLCs are doable, and you're spot on with the benefits of them.  I really like some of the other ideas that you mentioned too and will chat more with the attorney.  And I totally agree regarding the first deal.  It will be our chance to test the waters.  I think we'll learn a lot about each other and the synergy of the group once we get rolling.  When it's all said and done, I'll probably have a great case study to share with the BP group.  LOL

I agree with others. Speak to an attorney who specializes in business formation. Tell them how you want to structure the LLC, and they will get it sorted out accordingly. There are many ways to structure it so that those who contribute capital are paid back first, and after that income is distributed pro rata, etc.

I still think this is being thought of incorrectly.

Instead of first reaching out to the attorney, you should first reach out to your friends to see if this is something that they would be interested in.

Why spend $$ to an attorney when you are not sure if your friends are on-board.

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