Partnership Vs Joint Venture Vs LLC

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Partnership Vs Joint Venture Vs LLC

Isaac Lane
Investor · Columbus, OH · Member since 2019 · 81 posts · 87 votes

I currently have 4 doors and working on scaling my portfolio. I'm noticing that it's taking me longer than I would like to save up capital for my next down payment and decided that partnering on deals would help me scale faster. I have a few friends and family members that are interested in partnering on a deal. They want to invest money into the deal but aren't interested in the management or day to day operations of the property. I did some research on ways to legally structure a partnership and found that it can be set up as a partnership, joint venture, or LLC. I want to see if someone could explain the difference between the three and in which situations they work best?

Also what's a typical or reasonable equity/profit split in a partnership where one person provides the capital for the down payment and the other manages the day to day operations of the property? Thank you!


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Jerel Ehlert
Attorney · Austin, TX · Member since 2014 · 890 posts · 759 votes
4y

See "Real Estate Securities" by Levine and Feigin for the issue "when is it a security under SEC?"

I don't practice Illinois law, but in Texas, a GP/LP, JV, and LLC can ALL be a security or not. There are lots of ways to split this particular hair. Some are compliant with SEC regs and some avoid. Some are not compliant.

Talk to a lawyer in your jurisdiction. 

There's no "typical" split.  Talk to syndicators in your area and your potential investors.  See what they are trying to accomplish.

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  • Greg ScottPro Member
    Rental Property Investor · SE Michigan · Member since 2014 · 4k+ posts · 6k+ votes
    4y

    If they are putting money in without any involvement and expecting to receive a profit based on your efforts, you have created a security.  You should engage an SEC attorney to create a Private Placement Memorandum under Reg D.  Those can run several thousand dollars so the type of arrangement you describe typically does not work on smaller properties.

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  • Jerel Ehlert
    Attorney · Austin, TX · Member since 2014 · 890 posts · 759 votes
    4y

    See "Real Estate Securities" by Levine and Feigin for the issue "when is it a security under SEC?"

    I don't practice Illinois law, but in Texas, a GP/LP, JV, and LLC can ALL be a security or not. There are lots of ways to split this particular hair. Some are compliant with SEC regs and some avoid. Some are not compliant.

    Talk to a lawyer in your jurisdiction. 

    There's no "typical" split.  Talk to syndicators in your area and your potential investors.  See what they are trying to accomplish.

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  • Jonathan KlemmBusiness Member
    Moderator
    Contractor · Chicago, IL · Member since 2016 · 4k+ posts · 2k+ votes
    4y

    @Isaac Lane - You can structure a deal any way you want.  First I'd start by talking with a local attorney.  I'm here in Chicago and I know deal structure legalities may change from location to location.

    After that, I think the first question is whether you want to structure the deal with debt (loan) or equity (split of deal). The first bigger deal I worked on we used promissory notes and structured the deal with debt. 2nd time around we open up an LLC and both went on the by-laws (aka equity split) but my partner, in that case, was active in the deal.

    If you want to structure with equity then that's when you decide on JV vs. partnership.

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  • Crystal SmithPro Member
    Moderator
    Real Estate Broker · Chicago, IL · Member since 2014 · 2k+ posts · 1k+ votes
    4y
    Originally posted by @Isaac Lane:

    I currently have 4 doors and working on scaling my portfolio. I'm noticing that it's taking me longer than I would like to save up capital for my next down payment and decided that partnering on deals would help me scale faster. I have a few friends and family members that are interested in partnering on a deal. They want to invest money into the deal but aren't interested in the management or day to day operations of the property. I did some research on ways to legally structure a partnership and found that it can be set up as a partnership, joint venture, or LLC. I want to see if someone could explain the difference between the three and in which situations they work best?

    Also what's a typical or reasonable equity/profit split in a partnership where one person provides the capital for the down payment and the other manages the day to day operations of the property? Thank you!


    Regarding your question on the difference between a partnership, Joint Venture or an LLC. We've done all three. The only differences in our deals are that an LLC is officially filed with the State while partnership or Joint Venture agreements do not necessarily have to be filed with any government entity.

    The situations that have worked best for us with family and friends who want to be passive investors:

    We've used Joint Ventures when flipping properties. Friends and families provide the funds to acquire and renovate while we manage the project Upon completion funds are distributed in accordance with the JV agreements.

    With regards to holding properties with friends/family- We've used LLCs to hold properties wit friends and families. The LLC holds the property. The operating agreement defines the capital contributions and how proceeds are distributed.

    With regards to what's a reasonable split between management and friends/family there's no set formula/answer to that.

    You'll note something in my response- Friend and family are bolded.  I mention that because many of the responses to your question will reference the Security Exchange Commission (SEC) and creating a security. Eventually to really scale you're going to need to go beyond friends and family. So become familiar with the laws regarding solicitation of $. 

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  • Ronald RohdePro Member
    Attorney · Dallas, TX · Member since 2016 · 5k+ posts · 2k+ votes
    4y

    If you want actual numbers. I'd have a capital partner put in 90% of the equity, in exchange for a 50-50 split of profit, 1% acq fee, 2% dispo fee, PM, 0.5% asset management fee annually of total equity. These are numbers I'd do personally.

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