partnerships- one guy money other contractor!!!!

9 Replies

as of now i am a partner in a plumbing company with my father. after working for investors on the plumbing and light remodel end i want to venture into the house flipping end. So here is my question, keep and mind i like everything straight forward and all my bases covered. I have a friend who has cash and wants to buy in. my plan is to let him purchase the house and i fund the labor and materials for the renovation. at the end of the day we split the profit 50/50. my plumbing company is a incorporation and i plan on keeping it totally separate from this journey. my plan is to start an LLC and contract the work through the LLC. I plan on floating the materials through a home depot credit card until profit is received. everything will be recorded for materials with receipts this way. i have 10k cash laying around i will slowly deposit into my personal account, then deposit the 10k into the LLC. (paper trails) i can then pay the labor for the property with the cash i deposited through. my plan was to then send an invoice to my friend and get paid at settlement if this possibly. what ever is left goes to him since he is buying the property in his name. should i be on the deed as well? is it better not to have an LLC and do it personally the same way? if i contract the renovation through the LLC do i need to carry workers comp and general liability like my plumbing company. how to i then get the profits from the LLC to me personally? how do we not pay capitol gains since this is our first one and who's know how it will go? what am i missing here in my head i sounds like it will work but i have to be missing something here. he is eager to put an offer in on a property and i think all this needs to be ironed out before we go forward. he also owns another business which is a body shop. i am open to any ideas or insight anyone has! we are located in wonderful new jersey i might add where nothing is easy!

Form an LLC partnership and purchase the property through the LLC, this way the LLC owns the house. the two of you should sit down with an attorney and spell out an agreement that the two of you feel comfortable with. If you hold the property for less than a year, you will pay capitol gains on any money you do make but it will split between the two of you. that said there is a differed sales trust you may be able to put the money into and purchase the next property with, which as it says defers the capitol gain, but again, speak to your attorney and CPA about that.

thank you for your input. Does that llc need to hold workmans comp and general liability since you will be pulling permitts under that LLC. Another variable is he has real cash( dollars bills) which somehow we would need to get into the LLC

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No, the LLC will hire Drews Plumbing to do the work, Drews Plumbing will need the workers comp and liability, hire all the Contractors. the only thing the LLC will need is the right insurance on the property. The money he puts towards the LLC is a Loan to start up the LLC, there should be in the agreement in writing that he is to get back his original investment plus what ever terms the two of you come up with.

this is good! I'm starting to get this process! The big question is how do we not throw a red flag when all the sudden this LLC gets 30k of cash (dollars bills) into the account to purchase the property

In order for the LLC to be legitimate from the legal standpoint no co-mingling of funds must occur; meaning the funds of the LLC are to be separate from all other activities. Think of the LLC as a box which you can put money in and take money out.

Once you have created the LLC and come up with a partnership agreement you have an empty box. I would advise opening a bank account in the LLC's name. The startup money can then be deposited into the bank account. That money is the partner's contribution into the partnership and by extension his basis in the LLC. All of the activity (income and expenses) must happen from within the box. In a similar regard that bank account cannot be used to pay for expenses that are outside the box.

You can continue putting money into and out of the LLC by means of this bank account. Each transaction is a corresponding contribution/distribution.

I understand what you are saying. I guess I'm being very cautious because with my plumbing company being a corporation the rules are very strict. My point is I don't want the irs to say at the end of the year where did this "30k" come from originally? I also wanted to kind of be seperate from him in my own way some what just incase but that doesn't seem like an option giving the circumstances.

thanx George! I'm 28 years old and money is always on my mind it's my hobbie and so is Buisness. Just trying to figure out another asset in life by working off someone's money being that the renovation end won't cost me as much as the purchase price ideally. I ask questions everyday to people to try and grow knowledge o be successful i appreciate everyone's feedback so far!

Like someone mentioned these kind of disproportionate partnerships (as far as money contribution) rarely work. I would likely recommend setting up some sort of commission structure with your investor. You'll do the work, you'll put up the money and expenses as far as the repair work goes. You are essentially invested in the success of the flip, if no money is made on it you don't get paid for the rehab work; if the property makes money you get a portion (say 50% if that is the agreement) as payment for the rehab work. He can take an expense for a "rehab" payment to you, and you would pick up income in that amount thru whichever entity you want to do the work thru. Unfortunately, the money you collect would be ordinary income (not subject to preferential capital gain rates) just like any other money you collect as a contractor. 

A typical partnership scenario where one individual puts up $$$ equity and the other puts up sweat equity is tough to work in a tax scenario. It can be done.