How to structure a partnership.
Robin CastilloPro Member
Absecon NJ · Member since 2022 · 15 posts · 3 votesHow to structure a partnership.
Most Popular Reply
Ashish AcharyaBusiness Member
CPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes@Robin Castillo You're making a great move by planning your partnership structure early—it’ll save a lot of confusion and potential issues down the road. Since you’re teaming up with two lifelong friends, it’s essential to formalize everything even if there’s strong trust.
Start by forming a multi-member LLC in the state where you'll invest. This offers liability protection and sets a clear legal and tax foundation. You'll need an operating agreement that outlines ownership percentages (which can be based on capital, credit, or effort), how decisions are made, each partner's role, and what happens if someone exits the partnership.
When it comes to financing and profit splits:
- You can split everything equally if all three of you contribute the same.
- If one partner puts in more money or signs on the loan, you might offer them a preferred return or a larger equity share before dividing remaining profits.
On the tax side, the LLC is a pass-through entity, so each of you will receive a Schedule K-1 reflecting your share of income, expenses, and depreciation. Typically, these tax benefits—including any bonus depreciation—are split according to ownership, unless your agreement states otherwise. If one of you qualifies as a Real Estate Professional, they may be able to use the rental losses to offset their active income.
Loop in a real estate-focused CPA early to ensure your structure supports long-term tax efficiency, clean bookkeeping, and proper allocation of benefits. A solid legal and tax foundation now will protect your friendship and help your investment partnership scale smoothly. If you want a sample LLC operating document, please let us know.
This post does not create a CPA-Client relationship. The information contained in this post is not to be relied upon. Readers should seek professional advice.
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13 Replies
- Accountant · NY · Member since 2025 · 39 posts · 41 votes1y
Congrats on getting started. Partnering with lifelong friends can be awesome if you set things up right from the beginning.
My advice: don’t skip the operating agreement. Even if everything feels solid now, it’s important to clearly lay out ownership percentages, who’s bringing what to the table (money, time, skills), how profits and losses are split, and what happens if one of you wants out down the line. Think of it like a prenup for your business; it protects the friendship.
For taxes, the LLC will file its own return, and each of you will get a K-1 showing your share of income, expenses, and depreciation. That depreciation can be a nice benefit, even if you're cash flowing. Just make sure everyone's clear on how it works so there are no surprises come tax time.
Communicate everything, write it down, and treat it like a business from the start. That’s what keeps the partnership strong long term.
- Absecon NJ · Member since 2022 · 15 posts · 3 votes1y
Quote from @Account Closed:
Congrats on getting started. Partnering with lifelong friends can be awesome if you set things up right from the beginning.
My advice: don’t skip the operating agreement. Even if everything feels solid now, it’s important to clearly lay out ownership percentages, who’s bringing what to the table (money, time, skills), how profits and losses are split, and what happens if one of you wants out down the line. Think of it like a prenup for your business; it protects the friendship.
For taxes, the LLC will file its own return, and each of you will get a K-1 showing your share of income, expenses, and depreciation. That depreciation can be a nice benefit, even if you're cash flowing. Just make sure everyone's clear on how it works so there are no surprises come tax time.
Communicate everything, write it down, and treat it like a business from the start. That’s what keeps the partnership strong long term.
Thank you, this is very helpful information!
- 1yNicholas L.Pro MemberFlipper/Rehabber · Pittsburgh · Member since 2018 · 6k+ posts · 5k+ votes
i would not partner - these types of properties are too small to support multiple investors
just house hack separately
good luck
- Absecon NJ · Member since 2022 · 15 posts · 3 votes1y
Quote from @Nicholas L.:
i would not partner - these types of properties are too small to support multiple investors
just house hack separately
good luck
House hacking at this time is not an option due to my line of work and my friends are out of state but will consider for the future, thanks!
- 1yAshish AcharyaBusiness MemberCPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes
@Robin Castillo You're making a great move by planning your partnership structure early—it’ll save a lot of confusion and potential issues down the road. Since you’re teaming up with two lifelong friends, it’s essential to formalize everything even if there’s strong trust.
Start by forming a multi-member LLC in the state where you'll invest. This offers liability protection and sets a clear legal and tax foundation. You'll need an operating agreement that outlines ownership percentages (which can be based on capital, credit, or effort), how decisions are made, each partner's role, and what happens if someone exits the partnership.
When it comes to financing and profit splits:
- You can split everything equally if all three of you contribute the same.
- If one partner puts in more money or signs on the loan, you might offer them a preferred return or a larger equity share before dividing remaining profits.
On the tax side, the LLC is a pass-through entity, so each of you will receive a Schedule K-1 reflecting your share of income, expenses, and depreciation. Typically, these tax benefits—including any bonus depreciation—are split according to ownership, unless your agreement states otherwise. If one of you qualifies as a Real Estate Professional, they may be able to use the rental losses to offset their active income.
Loop in a real estate-focused CPA early to ensure your structure supports long-term tax efficiency, clean bookkeeping, and proper allocation of benefits. A solid legal and tax foundation now will protect your friendship and help your investment partnership scale smoothly. If you want a sample LLC operating document, please let us know.
This post does not create a CPA-Client relationship. The information contained in this post is not to be relied upon. Readers should seek professional advice.INVESTOR FRIENDLY CPA®5241 Reviews - 1yScott WolfPro MemberLender · Boca Raton, FL · Member since 2014 · 1k+ posts · 956 votes
Quote from @Robin Castillo:
Hi all, starting out and partnering with my two long life friends. Trying to figure out how to structure a partnership, how to split profit but mainly how to finance and share tax benefits. We will be buying small multi family and forming an LLC so if anyone is on the same boat I would appreciate your input, thank you!
Definitely lay everything out, and you'll need the Operating Agreement for funding when you get to that point.
- Rental Property Investor · Round Rock, TX · Member since 2016 · 1k+ posts · 971 votes1y
@Robin Castillo Here is my 2¢ FYI:
1. You shouldn't do business with family or friends. Or generally, folks you can't afford to lose your relationship with them.
2. If you are looking into setting up JVs or partnering, it would be good to get first on the same page with your potential partners. Before you can start to set up the legal framework, various issues need to be addressed. These can be summarised as follows:
What are the objectives of the joint venture?
- general trading principles
- what will the business actually be doing
Who puts what in?
- cash
- other assets
- services
- are any existing contracts of either to be taken over by the joint venture
- who actually does / will do what
Will any external funding be needed?
- who will it be raised from
- who will borrow it
- who will guarantee it
Who gets what out?
- sharing of revenue profits or losses
- sharing of capital gains or losses
- is any payment to be made to either other than as a share of profits, eg for ongoing services
- will the participants be operating a ‘salary/dividend split’ – ie taking their month-by-month requirements by way of low salary, balance as dividends?
What, otherwise, will be the policy in relation to dividends – to what extent is it intended to distribute/retain surplus profits?
Who controls what?
- responsibilities for day-to-day running, in all relevant areas of activity
- tactical decision making (day to day)
- strategic decision-making (longer-term policies)
- what things can only happen if both parties agree
- what will happen if you can't reach agreement on some major issue - ie deadlock
What happens if either party 'wants out'?
- on what kind of notice will this be permitted
- does the other have 'first refusal' to take over the whole venture? - if so, on any favourable terms?
To what extent will the parties be free to carry on other businesses
- while the joint venture subsists
- if one party pulls out
Is it intended that spouses/partners should also be shareholders, to allow for tax advantages from a broader split of dividends?
Is there a vision that any others will become shareholders (or be granted grant options to acquire shares) in the company in the future?
- Who?
- Staff?
- Others?
- On what terms?
Participation in dividends?
Voting rights?
Are there any offshore angles:
- Is there potential for overseas sales or operations?
- Does anyone involved in the venture have any overseas connections?
- Does anyone involved in the venture have any plans to live overseas in the future?
Is there yet any written:
- business plan?
- marketing plan?
- cashflow projection?
Is there an ‘exit strategy’? If so, what is it – which of the following most closely hits the mark?
- ‘lifestyle’ business – ie simply intended to be run by and to provide an ongoing source of work and income for the proprietors, no clear vision for the long term future?
- possibility of future sale at some point?
A core object of the venture is to create an asset with a view to sale or flotation in 5 years?
Which aspects of the above do you feel most important at present?
Which aspects concern you most?
(NB each of you may have a different view here, the question is asked to help understand where each of you is coming from)
More info:
How to Effectively Conduct Joint Venture Agreements as a Real Estate Investor
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Partnerships and joint ventures are tricky. So, my first suggestion is...don't do it.
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https://www.biggerpockets.com/renewsblog/2014/03/05/questions-for-capital-partners/
https://www.biggerpockets.com/renewsblog/2006/11/16/real-estate-partnership-questions/
https://www.biggerpockets.com/renewsblog/questions-ask-investment-partners/
3. Plus weekend bonus - check out my “conversation” around crafting a partnership agreement - https://chatgpt.com/share/6724065a-5b98-8000-a466-d42087bfc2f9. Not a substitute for a lawyer, but you can use it to flesh out a lot of details and get pretty close to the target agreement.
- Absecon NJ · Member since 2022 · 15 posts · 3 votes1y
This is great info, thank you!
- 1yBasit SiddiqiBusiness MemberAccountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
There are three characteristics for a successfull partnership - Money, Time and Experience.
What traits do you have and what traits do youur friends have?
I normally don't suggest friends start a partnership just because they are friend but because they have all the characteristics to make a successful partnereship.
Basit Siddiqi CPA4.979 Reviews - Member since 2023 · 27 posts · 5 votes4w
Three partners on a small multifamily property is where I'd start, because it shapes everything else you're asking about.
Fewer partners, fewer problems. Every partner you add is another set of expectations, another life event that can unwind the deal, and a smaller slice for everyone. A small multi doesn't produce enough cash flow to make three people feel well paid, and that's usually where the resentment starts.
I'm not telling you not to do it. Two of the three of you may be better suited as the money and one as the operator, rather than all three doing a bit of everything. Worth asking out loud before you file anything.
On the split itself, here's the piece that makes this easier.
Stop trying to solve one number.
Carve cash flow, equity, and depreciation separately. They don't have to move together, and treating them as a single pot is exactly how three friends land on 33/33/33 and quietly resent it in year two.
Cash flow gets allocated by contribution percentage. Money in the deal drives that piece.
Whoever is doing the actual operating work takes a carve-out off the top, before the split. Finding the market, analyzing properties, making offers, running due diligence, managing the property manager. That's a job with ongoing hours in it, and it should get paid like one rather than being folded into an equity slice.
Then reverse-engineer the rest. Figure out what return each partner needs to feel good about their contribution, solve for that, and negotiate what's left.
Now the thing that will catch you off guard, and it's legal rather than a fairness question.
Every partner in a joint venture needs a genuine active role. When somebody only funds the deal and then waits for a return, you've drifted toward securities territory, and the SEC looks at what's actually happening rather than the label on your paperwork. People have gone to jail over getting this wrong.
With lifelong friends that feels like overkill. It isn't. Give each person a defined role in writing. Approving the annual budget. Signing off on capital expenditures over a set amount. Reviewing monthly statements. Small, real, and documented.
An hour with an attorney who does JVs will settle it, and this is the one part I wouldn't improvise.
On financing, one thing to sort before you get attached to a property. Ask a lender what they'll actually do with a three-member LLC.
Most residential lenders won't lend to the entity on a small multi. You'll likely be buying in one or more personal names with the property deeded into the LLC afterward, and you need to know whose name, whose debt-to-income gets consumed, and who's personally guaranteeing. That person is taking the largest risk in the deal and it should be priced.
Have that conversation before you write an offer, not after.
Then the part almost nobody writes down, and the reason friend partnerships fail.
The exit.
What happens if one of you needs money out in year two? What if somebody gets divorced and this property lands in a settlement? What if the roof goes and one partner can't fund their third of a capital call? What if one of you dies?
Put a buy-sell in the operating agreement with a valuation method and a timeline. Put in a capital call provision with a real consequence for not funding, usually dilution. Spell out who can sign for what, and what happens when two of you agree and one doesn't.
You want all of it written while everybody still likes each other.
Partnerships between friends rarely blow up over the split. They blow up because nobody decided in advance what happens when something goes wrong, and now it's a holiday dinner and nobody's talking.
- 3wJason MalabuteBusiness MemberAccountant · Los Angeles, CA · Member since 2016 · 2k+ posts · 900 votes
Sorting this out before you buy is the right instinct. The common setup is a multi member LLC in the state where the property sits, with an operating agreement that spells out ownership percentages, how decisions get made, each person's role, and what happens when someone wants out. On splits, an even three way split is fine if all of you are contributing the same, but if one person is putting in more cash or signing on the loan, a preferred return or a larger equity slice before the rest gets divided is a normal way to handle it. Assuming the LLC is treated as a partnership for federal purposes, it files a partnership return and each of you gets a Schedule K-1 with your distributive share of income, deductions and credits, though the K-1 will not itemize every individual expense or depreciation component. One thing people get wrong is assuming the tax items automatically follow ownership percentages. Section 704(a) starts with whatever the agreement says, but 704(b) requires the allocations to line up with the partners' real economic interests when the agreement is silent or an allocation lacks substantial economic effect, and 704(c) has its own rules if any of you contributes property instead of cash. Bonus depreciation is also decided asset by asset and generally applies to property with a recovery period of 20 years or less, not the building shell itself. And if one of you is counting on using rental losses against nonpassive income, that requires meeting the real estate professional and material participation tests, since ownership by itself is not enough. Get a real estate CPA involved while the agreement is still being drafted so the legal structure and the tax reporting actually match. The exact answer depends on your facts, so talk it through with your own CPA or tax advisor.
Malabute & Company CPAs525 Reviews - 3wNicholas FloydBusiness MemberNY · Member since 2026 · 187 posts · 67 votesOne thing I’d add from the funding side is to think about the financing structure before you start applying. I help business owners access business funding, including 0% APR business credit cards, business lines of credit, business loans, SBA 7(a) funding, and revenue-based funding, depending on the borrower and business profile. With a newer LLC, many funding options can still rely heavily on the personal credit of the owners or guarantors, so having the entity, banking, ownership, and credit profile structured properly matters. If the LLC is brand new, has little operating history, or is in an industry some lenders view as higher risk, I also have legitimate aged/shelf corporation options available. A shelf corporation can sometimes help maximize funding potential by giving the business more entity age and helping it fit lender criteria that may be harder for a brand-new LLC to meet. It does not bypass underwriting or guarantee approvals, but when used correctly and transparently, it can improve how the business is positioned and potentially open the door to stronger funding options. Before buying the first property, I’d make sure the operating agreement, ownership percentages, tax strategy, and funding plan are all mapped out together.
- Financial Advisor · FL · Member since 2024 · 441 posts · 99 votes3w
Hi Robin, A partnership should be structured based on investment capacity, level of expertise, and operational involvement. Please share a summary of your teams so we can outline and suggest a few models that would fit their specific profiles. Feel free to reach out directly for more details, I'd be happy to help!
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