Partnership Agreements Advice

12 Replies

Good morning BPs,

I'm relatively new to REI and am starting a new venture with some of my military brothers in wholesaling and flipping. We're all very hungry, but want to ensure we start the right way administratively to avoid obstacles down the road. As we begin together, one of the processes, I'm a bit clueless on, is whether it is wise to doctor up a partnership agreement and if there are some specific language to include.

I'd greatly appreciate any information or insight anyone has with starting this grassroot venture with partners. 

@Rod Murray Congrats on starting your RE journey!  My best advise in regards to a partnership is spend the money and hire an attorney to form an entity and operating agreement for you and your partners. This will spell out ownership interest, purpose, etc. It is critical that you do this. An attorney will use all of the necessary language so you won't have to worry about it.  Just make sure it is someone impartial to all parties. 

@Rod Murray the best way is to have an attorney to form the partnership for you in an operating agreement, and have it completely outlined for what you both want and need in the partnership with outs if one or both of you want to end the partnership. The biggest thing you'll hear about is that a partnership goes south and that there was nothing in writing and it created a nightmare and caused headaches to get out along with someone getting an advantage over the other person/people in the business. Do the upfront work so that you do not pay more on the backend, and that goes for you partner(s) too. It will cost a lot more if you have to go after what was rightfully your money/deal/etc. verse getting it completed prior to starting the endeavor. 

@Greg Franck @Peter Mckernan Gentlemen, Good morning and Thank you for this sound advice! Initially, we thought this was a task we could hammer out ourselves, but it definitely will remove a headache doing it this way. (I was already struggling w/ documentation format lol). 

A follow-up question, if I may, does it matter if the attorney is in a specific state if we are not co-located and spread across multiple states?

@Rod Murray I would get an attorney that is well versed in business/real estate and that knows the laws in the state that you will be investing/doing business in due to needing to go back that attorney for some other advice or anything that arises in that state that you are conducting investing/business in.

Rod,

An attorney in the state you will be doing business in to hammer out the operating agreement is a good idea.  I have properties in multiple states and I have an attorney I work with in each state.

@Rod Murray I would do some research into partnerships in general. Some things to consider:

-Make sure you and your prospective partners have the same long-term goals with regard to your business. 

-Is everyone going to contribute the same amount of time to the business?

-Is everyone contributing the same amount of money to get it started? What happens when the business needs more money 6 months from now? 

-How does everyone get paid? Is it an even split? Salary-based or commission-based?

-How will the business end? What if someone doesn't want to do it anymore? Do they have to be bought out?

-Explicitly state who will be doing what in the business. 

-Make sure you're partnering with people who have complementary skills. For example, if three of you are all sales-focused, but no one is a numbers guy/gal or no one wants to do be in charge of the finance/accounting side, then you're probably going to have some friction. People should not all be bringing the same skillset.

-Just because you're friends with these folks, does not mean y'all will make good business partners. Realize the business could jeopardize your friendship if you don't address some of these potential issues!

Best of luck and keep us updated on your journey.

@Douglas Spence Good morning! Wow, this is a lot of great information! These are a lot of great questions to start with. Knowing them for over 10+ years, I'm confident we share a lot of the same intentions/goals/initial contributions, but the skillsets are definitely something we have to map out. 

I truly appreciate this and will definitely keep you updated on our progress. Have a great day!

@Rod Murray I would find an attorney in the state that you decide to register the entity. Certain states have more favorable treatment (ie protections ) for businesses. As @Peter Mckernan stated probably want someone who is well versed in the business venture / area you are pursuing to develop the operating agreement as they will have critical insights which could be overlooked by others. 

@Greg Franck Thanks for the response. That's what I've been looking into all day. Being in Texas, thought it would be easier to just register here, but upon further research states like Wyoming and Delaware are also states I've looked at to create the series LLC.