Partnership Question

[Nick Intrieri]

Looking to form a partnership with another newbie investor in my area. This is going to be our first deal together. I am wondering what are the best ways to, legally speaking, to "formalize" so to speak the business relationship? Is it necessary to create an LLC or can we draw up a simple agreement on equity shares and both sign it? How does it work when applying to the bank for a loan?

Thanks all for any advice. I would assume this is a common question but could not find any topics specifically on this. 

Thanks

Nick

[Brian Burke]

If you aren't forming an entity it's not an operating agreement, its a partnership agreement. It's mostly semantics, there's no practical difference.

There is a difference, however, between a General Partnership (which is the default if no entity is formed) and an LLC or LP. I get that you trust your buddy with your life and money but that's not the point. What if he gets in a car accident and an injured party obtains a judgment against him? The judgment creditor records the judgment and now it is a cloud on the title of the property. Now let's say that the house had doubled in value...half of that increase belongs to you, but the recorded judgment jeopardizes your equity, and the judgment creditor can foreclose on the property. Had you owned it in an LLC the judgment would have only attached to his proceeds from the sale of the property (if you decide to sell it), not the property itself, and the judgment creditor can't foreclose.

I'm not a big proponent of forming LLCs for the casual RE investor who works alone and many LLCs are formed unnecessarily.  But in the case of investing with a partner, the game changes.  Additional risks are introduced and you have to decide whether to tolerate those risks or mitigate them.

As to borrowing in the LLC, you can't get conventional loans but you can usually borrow from local banks and specialty lenders. Even without business credit...the lenders will be underwriting the principals not the entity and y'all will need to sign personal guarantees.