Seattle, WA · Member since 2013 · 6 posts · 0 votes
Say a limited partnership is formed to purchase a rental property. I understand it's typical for the general partners to contribute less money compared to their interest in the partnership since the general partner will manage it and take on the liability. Example:
Limited partners contribute 95% of capital and get 80% interest.
General partner contributes 5% of capital and gets 20% interest.
I just made up the percentages but they seem reasonable. Are they? Is there a typical split in the industry?
Investor · Gaithersburg, MD · Member since 2013 · 660 posts · 441 votes
12y
I will try and expand on what Duncan said. In a partnership, the general partner is fully exposed so I'd recommend (like Duncan said) never being a GP yourself. Always use an entity.
I think (and Duncan will correct me if I am wrong) if you are the person who will maintain it, if you want a 20% interest for example, be a limited partner for 19% and have an entity that you control be the GP for 1%. That way you get your 20% and don't have to be personally exposed. You should consult a lawyer and CPA either way, because doing it that way vs 20% to the entire entity you control has both different tax and protection situations.
Say a limited partnership is formed to purchase a rental property. I understand it's typical for the general partners to contribute less money compared to their interest in the partnership since the general partner will manage it and take on the liability. Example:
Limited partners contribute 95% of capital and get 80% interest.
General partner contributes 5% of capital and gets 20% interest.
I just made up the percentages but they seem reasonable. Are they? Is there a typical split in the industry?
Thanks!
That strongly depends upon the type of situation. Is there financing involved? There are many variables. What are the duties the GP is taking on?
Real Estate Investor · Member since 2013 · 866 posts · 487 votes
12y
I'd talk to an attorney before I structured a LLP that way.
In the LLPs I have had setup, the general partner was never a natural person, assumed all of the liability but only had 1% interest. The limited partners put up all the capital were natural persons or entities depending what the partner was trying to accomplish, had 99% interest and had no liability beyond their capital contribution.
Investor · Gaithersburg, MD · Member since 2013 · 660 posts · 441 votes
12y
I will try and expand on what Duncan said. In a partnership, the general partner is fully exposed so I'd recommend (like Duncan said) never being a GP yourself. Always use an entity.
I think (and Duncan will correct me if I am wrong) if you are the person who will maintain it, if you want a 20% interest for example, be a limited partner for 19% and have an entity that you control be the GP for 1%. That way you get your 20% and don't have to be personally exposed. You should consult a lawyer and CPA either way, because doing it that way vs 20% to the entire entity you control has both different tax and protection situations.
Seattle, WA · Member since 2013 · 6 posts · 0 votes
12y
Thanks for the feedback. I should have phrased my question better. I'll try to improve... Ignore the liability - I think I understand how to shield natural persons from liability (e.g. through an LLC instead of an LP).
The situation is more such that I have some software friends with money who want to diversify into real estate but have no clue how to do it (call these the "investors"). I would help them by essentially being the manager of the money (call me the "manager"). So say 4 of them each contribute $120K and I contribute $20K for a total capital of $500K. I would use this money to purchase a property, or properties, and we would each get a 20% ownership stake. I would get more ownership compared to my contribution because I run the investment. Is that fair?
I understand we can agree on whatever but I'm trying to understand if there is a typical split for this type of situation or what would be a fair way to split it.
An analogy would be a hedge fund where the manager contributes very little of the overall capital but gets 20% of the profits because they are the manager.
Real Estate Investor · Member since 2013 · 866 posts · 487 votes
12y
A couple of things to chew on:
If you use a multi-member LLC the division of profits does not have to be the same as the percentage of ownership. But from what you describe above, each having 20% even though you are putting in less is not unreasonable.
I kind of on the fence if I would use a LLC, LLP or a C-corp or some combination for this. There are pros and cons for each and I'd need to know a lot more details. Your attorney or CPA should be your guide here. I'm currently doing something similar to this on a larger scale in WA and after a lot of discussion, we settled on a C-corp to manage the assets and a LLP to own the asset with the management C-corp as the general partner with 1% ownership in the LLP.
I would strongly urge you to use a CPA not just a tax preparer. The money spent now will return many times over in prevented problems and hassles.
Accountant, Enrolled Agent · Grayslake, IL · Member since 2011 · 5k+ posts · 2k+ votes
12y
I will agree with @Duncan Taylor , that you want someone experienced in entity selection and not just your Average Joe preparer/accountant. They need to know real estate investment as well.