How to structure a partnership?

Question

Hello BP Team,

I am currently working  on establishing a partnership with a person who i know for a long time. Eventually, we want to acquire a SFR or Duplex for Buy'n'Hold with 20% down and total cost between $100k-$150k.

My role will be active  - looking for the deal, doing negotiations, all paperwork and eventually managing the property. My name will NOT be on the loan. I will participate with 25% of down-payment portion and will require a 25% of the title. We will split the cash-flow in the same proportion - 75/25. I will be taking 10% a Management fee. We will split all expenses in the same proportion - 75/25. I will be paying my part of the loan by direct deposit to him.

How would you structure the partnership ? We do not want to open a legal entity.

What legal documents you will recommend signing in ?

Kyle

Will Barnard · Answer

My non legal, opinionated advice is to form an entity in the state in which the property is located. For advice on which structure you and your partner should use and what other legal or accounting structures you should take, you should be consulting your legal and accounting team. Taking such advice from the public here is not the best way, it does however give you some insight into where you should be headed. Only your legal team with knowledge of all your details should be making this decision.

Rick H. · Answer

Having an out of state entity doesn't really help you when you need it most.

The most practical way is for you two to hold in a title holding trust with a 3rd party trustee, naming you or your own family trusts as as beneficiaries in their respective % beneficial interests along with an Operating Agreement.

One person the can help you is Ward Hanigan in San Diego as he's helped hundreds that I know as trustee.

To learn about entity structuring their might be a forum on BP, but be careful who's advise you follow. Another source is Dykes Boddiford who teaches an occasional seminar as well as the book by attorney Mark Warda on trusts which ought to be useful.

I've used a CA corp with sub-S election and THT's for years. It works well for my operation and tax structure. When I've been sued, insurance can be helpful but not a sure thing. (Ask me how I know).

No doubt others my chime in an tell you how wrong my advise is. That's ok.

Remember Canadian funnyman Red Green's lament: "When the stuff hits the fan, it tends to be distributed unevenly." No truer statement has been told.

Bill Gulley · Answer

I like your second proposal much better. If you were not on the note and had an agreement to share profits, they can't be counted to the debt coverage, being on the note, shared appreciation, paying debts first and splitting net proceeds is much better. Good luck  :)

Brian Gibbons · Answer

California's absolutely insane at $800 to file papers, but it costs a lot of money to do business in California

Jerry thanks for your comments I love how hard you work for your investor clients

@Will Barnard  thanks for your comments advising the OP

Bottom line doing business in California cost money so make sure that there's an upside potential

Jason Mak · Answer

Since you mentioned that it is for a long term hold, I would also consider the LLC route despite its costs - if the size of your deal warrants it.

There are certainly risks (but that's what insurance is for) - but you can just own the property as tenant in common (so you'll be under title).  You guys can both probably be on the loan but he'll need to be the guarantor since he owes over 30%.

My guess is that all your other agreements would need to be documented on an operating agreement.

Brian Gibbons · Answer

Oh I agree $800 in California for a LLC formation is kind of crazy but I don't know anyway around it

I know you can go get a Wyoming LLC for 50 bucks but u live here

Maybe Rick H.

Kalo (Kyle) Atanasoff · Answer

Bill Gulley

The issue is that we both (me and our potential partner) live in CA. Our bank accounts are here, in CA as well.

Best,

Kyle

Manolo D. · Answer

@kyle the@mention did not work.  I am not sure about the things that I will say, but let me know if you talk to a lawyer, or if you dont plan to. To myunderstanding, if your llc is in say AZ, your registered agent is in Az, your business is earning in Az, then pretty much it is an Az llc, which means that it is NOT doing business in Ca, therefore you only pay Az taxes on that llc, and once you draw/split profit, you will be entitled to pay Ca PERSONAL income taxes, you might have to pay the 10% as 1099 management fee to yourelf as a WORKER. It is like if your cousin owns a rental in Az and he is from Az (your llc is your cousin in this case), he does not have to pay Ca taxes when he is paying you and giving you money, but you have to files those monies on your own when you file your taxes. Like I said, this is not legal advice but its just my opinion on how corps work.

Its justa liability issue when you own or name them direct to you.

Manolo D. · Answer

there is 80% that i am wrong, but, i thought that if you are not doing biz in CA, you dont have to pay the ftb. if they form out of state and the business is out of state, they could just receive dividends. resident agent plus virtual office may run around 300/year. this is considering the property is not in CA.

Bill Gulley · Answer

Let's take this apart a bit.

You have cash for the down payment.

You want a 25% interest.

You want 10% management off the top.

And, you can not be on the note.

First question, are you a Realtor?

You might structure your interest with a note.

If you are in title, you will be on the security agreement, deed of trust, but you may stay off the note.

Frankly, I don't mind personal liability issues with rentals, good management keeps me from being negligent and in any event someone chases me, I'll sick my pit bull insurance agent and company on them, no one here will get past the liability limits even if 20 kids fall off the roof or the place blows up.

If you're a Realtor, you can manage without being in title. You could do some management as a lender if an assignment of rents is made for the note and you are collecting note payments then disburse left over amounts to the owner. If you do one deal, that may work without servicing issues, if you plan on doing this over and over, you will have lending issues.

Costs of filing a foreign corporation is often more than domestic entity, an entity will need to be registered, one way or another in the state where the property is located to act in matters related to the property. Accounting costs can be more too with foreign entities.

I agree with Jerry, informal partnerships can be an issue, but I've done many with those I know well, I simply took title as tenants in common at a % interest and we'd write up an "operating agreement" to guide us. One such partner being my wife's cousin, more like her brother. Even if you know someone you need a formal agreement in case we get hit by a bus type stuff.

Better to go the LLC route, cost may be an incentive to make more money.

I'd suggest you both have a sit down with an attorney and your accountant too. :)

How to structure a partnership?

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