Operating Agreements and LLCs

10 Replies

Probably not if just a single-member.  Double not if no real business purpose.

If starting an actual enterprise with partners, yes. Have a good OA.

The better question is do you need an LLC at all?

I formed my own LLC and used an online service to draft the OA. To @Steve Vaughan 's point, I am a single member of my LLC so really simple.  Once you have more than one, you need to have your lawyer draw up the OA to make sure everything is spelled out really clearly, especially the exit criteria.

@Diana Johnson

If your going to set up an LLC, partners or not you should use an attorney to set it up correctly. In my opinion, it doesn't make sense to not set it up correctly. The purpose of the LLC is for asset protection and the operating agreement determines responsibility of each partner and what happens during disputes as well as many other factors of the business.

Set it up correctly.  The cost of not setting it up correctly will cost way more in the long run then the cost of the attorney.  

Good Luck.

Originally posted by @Diana Johnson :

@Steve Vaughan

Hi Steve. I left out that my business will be a partnership and our focus is on buy and hold. I was already sold on the LLC. LOL. Do you have different thoughts on that?

With partners, I'd definitely have a strong written agreement. If buying residential RE with debt, an LLC will make life much more difficult. You will have to get commercial financing. Higher rate. Shorter term. Bothering you for your financials every year. Form 1065. K-1s. Not horrible, but more work.

If buying a house with debt, I might consider buying as TIC with % listed and having a JV agreement. Conventional mortgages are available for tenants in common.

Still need everything written, so would consult an attorney either way with LLC or JV.

Having a partner complicates things exponentially.  Hope your brother is bringing real value to the table like skills and effort and experience and expertise.  Not just dollars.  If just dollars, consider making him a lender only.

Setting up your own LLC is easy, you do not need an attorney to do that for you. If there are multiple members of a LLC it is in your best interest to have a lawyer write up an operating agreement.

@Diana Johnson

If you are forming a multi-member LLC (or a partnership), you will probably want to work with an attorney to form them. As others have said, you can probably get by without an attorney for single-member LLCs. Multi-member LLCs are a completely different beast. I generally discourage people from forming one until they absolutely need it since it can get a bit convoluted.

In terms of partnership versus LLCs, I would say LLCs have more benefit than general partnerships. In Pennsylvania, for example, I can't really think of a good reason to prefer a general partnership over an LLC. Maybe financing? But the fact that you have no liability protection from your other partners make general partnerships problematic.

I also agree with @Steve Vaughan about money partners. Over the years, I have had to deal with many corporate matters --- both as a lawyer and as a shareholder/member. Unless you are following the limited partnership model, I think it is generally a bad idea to give equity to someone just because they bring money. Based on my experience, it is almost always cleaner to just have the person be a private lender instead.  

Disclaimer: While I’m an attorney licensed to practice in PA, I’m not your attorney. What I wrote above does not create an attorney/client relationship between us. I wrote the above for informational purposes. Do not rely on it for legal advice. Always consult with your attorney before you rely on the above information.

Essentially you will want to break down the pros and cons of having an attorney write up your operating agreement for a deal like this. For how many different issues COULD go wrong for a partnership, it is almost always worth it. Being an attorney in this field I've had to follow-up deal with many DIY operating agreements and LLCs, and the issue is that people don't know they make mistakes until it's too late. The reason it becomes even more important to have an attorney for partnerships is that your liability is higher while there is more chance for problems to arise internally. When you own your property outright you can easily decide how to handle different issues, but when you have partners there may be differences in opinions how to handle these situations.

A good attorney can draw up a solid operating agreement that will cover many different issues that may arise. It can be really valuable having an experienced mediator at your disposal, also!

This isn't legal advice, just my opinion as a real estate investor.

No. Nor do you need a CPA to file your taxes. However, I have an attorney and a CPA, because I want things done right to both protect me and my assets and to minimize my tax liability.