To partnership, LLC or Sole Proprietor-Tax Questions

15 Replies

Hello everyone, I have another question to run by you.  I am trying to figure out which is the best way to structure this deal and how to do it for tax purposes as well.

I am closing on property on Tuesday.  My father purchased the property cash.  The property is in my name. But the property is to be both for myself and my sister.  It will be a Buy and Hold investment.  At this point I will most likely get 55% (10% for PM) and my sister 45% of the profit since she lives on the other side of the state.  Or would consider input on the % split. I am trying to figure out which is the best way to structure the whole thing.  My sister will most likely do absolutely nothing besides collect her share of the rents and her share when it sold way down the road.  If it needs repaired then I will most likely do the repairs but I need to be compensated for that, but how?

So I am wondering which is the best way to structure the whole thing.  What forms are needed for tax purposes.  I don't really plan to partner with any others down the road either if that makes any difference.  

Appropriate all your responses

Honestly, a partnership is the best idea.  Keep a nice agreement in writing. THAT is your pre-nup and your divorce decree.  

It is up to you to determine your arrangement of compensation.

You have formed a partnership the moment you agreed to do business together. How are you paying back your father?

Insure well.

@Steven Hamilton II  Thanks for the quick reply.  If a partnership in best way.  Since we agreed to do this together, thus automatically forming a partership by default, is there anything further that needs to be done for tax purposes? EIN? I know I would need a GOOD agreement as well.  So since it is a partnership, how do you expenses and income?  Do you have to split receipts and split the rents or can I somehow take care of all of the income and expenses and they she gets her share of the profits.  If I am allowed to take are of all the income and expenses and then pay her for for her share, is it still passive income for her.  

As for my father-This is something that he wanted to do for myself and my sister.  How do you go about that tax purposes as well.

Sorry for the questions.  More info to fill the brain with.  Gotta love it.

You need to acquire and EIN. 

You should look up agreements online for ideas and clauses and meet with an attorney to put it together.  You can also write your own and have an attorney review it.  Most of them will have very detailed agreements.

Get a business account. Keep a nice reserve in it for repairs, etc.  Replenish the account and factor in capital improvements, turnover, etc..

Your father will have to file a gift tax return if the gift was over 14k each.  Since your name is on it it looks like it was one large gift to you.  You may want to put her name on it too. Or at least in the agreement it should spell out that is how it is being held.

@Steven Hamilton II  

Now is the EIN just under my name when you apply for an EIN or both names?  Then at the end of the year do you file an information return under that EIN?  What about the expenses and income.  Do they have to be split and then recorded on some form?  Can I take care of all the expenses and income and then disperse her share? Sorry I am not familiar on how it works. I guess i am wondering how all the deductions work and who records them and where.  I will have all the receipts.

The plan is to have my sister on the deed as well but being that she was not local I thought it would be easier to just get it all done and then have her added to the deed.  As for gift tax, it was a total of about $25K.  That is what he put up for money.  Half for me and half for my sister.  How should that be documented  for gift tax reasons?

You mention partnership and one of you will have to be the responsible partner.  He needs to document that it was for both of you. 

Yes, you give her share after deducting the expenses and the reserve amounts.  Just get her on the deed and make sure its written out that it is for both of you and that it was put in your name for that reason until she can be added. 

Was looking online, does the EIN have to go under some sort of business name?

Among other things, Your agreement should state your pecentage of ownership and capital contributions (could be father's gifts). Be sure to Keep owner's disbursements separate from labor.  Labor can be considered what you might pay someone to do (manage showings, collect rents, mow lawns, fix toilets, etc)  Whoever does the labor should get paid an agreed upon wage and include this in your expenses for the month. Owners get their share AFTER all expenses. Be sure to keep good records! 

I would advise a limited liability company of some type partnership liability is bad

@Jerry W. I have thought about doing the LLC thing. Not much more to setup than the partnership anyway. I think if we did the LLC we could then do all 3 of us on it. I have been looking into the difference between the member managed vs manager managed LLC's. Manager managed almost sounds like the better way for our situation where my father provided the capital, my sister will mostly be more silent and just collect the share of profits and my self will do the decisions and pay the bills etc.

I am trying to understand how it all works. I planned 10% for PM, but if that is part of what I would do, would the operating agreement have my share 10% higher or have in there some sort of agreement the profit share is 50/50 but if one person takes on the PM part then the share would be 55/45? I guess I was looking at it as I will be the one to taking care of that side of things and didn't want to have to actually pay my self from the LLC to do it. Again not sure exactly how things like that should work. I need to talk with an accountant or attorney and get more info as well.

@Curtis Bidwell Are you saying that for example if I myself did the (manage showings, collect rents, mow lawns, fix toilets, etc), then I should pay myself? I assume you are talking of course not by a % share but by an actual wage. If I did that then wouldn't I need to be either 1) and employee of the LLC thus creating payroll, tax withholding, work cmp, etc. or 2)do it as a contractor thus paying self employment taxes? Again I am not to familiar with all of it so I ask.

Of course writing an agreement up sounds like a huge task when you have a blank sheet of paper in front of you :)

@Mark Gruetzmacher Yes. In our LLC I get a percentage of income as a management fee that covers all activites related to managing the property (collecting rents, issuing notices, showings, signing contracts, move-ins, etc...). Then we set an hourly wage if any of the members perform work that we would otherwise hire out (repairs, maintenance). Finally, at the end of the month, quarter or year we take an owner's distribution equal to our ownership percentage based on the actual profits (after reserves).

Speak with your accountant about the best way to account for the income. (Owner's distribution should come as an equity draw ... tax free!)

Not to be construed as tax or legal advise :)

@Mark Gruetzmacher  

If you are making all the decisions, then you are managing the LLC. You will have a member-managed LLC -- you are the managing member. A manager-managed LLC is one that is managed by an outside agent that is not a member of the LLC and none of the members have any control over the management decisions. Member-managed does not have to mean that all members are active managers of the LLC, just that the LLC is managed by a member of the LLC.

Dave NA You say you get a percentage.  What kind of percentage do you have ours set at? So do you have it in your agreement that whoever does that takes X amount of %?  Can it also change to some other member and they then would get the % accounted for?  I suppose you can write it however you would like it.

@Mark Gruetzmacher  

If you have a good CPA they can set you up as an LLC structured as a partnership and advise you on everything. It's a little money up front but it will save you headache in the long run.

I think an LLC is the best route. In the operating agreement, stipulate that the LLC will pay a property manager 10% of revenue. Also, have the LLC nominate you as the property manager. The LLC pays you first for your work, then you and your sister split the profits after all expenses afterwards. I would have an attorney draw up this document to eliminate any issues later on.

Create Lasting Wealth Through Real Estate

Join the millions of people achieving financial freedom through the power of real estate investing

Start here