Real Estate Investor · Santa Cruz, CA · Member since 2009 · 267 posts · 73 votes
Can anyone provide insight into various approaches to structuring an entity for a single-property acquisition with two partners, one being the operating/managing partner, and the other being the silent majority equity partner?
We are in contract on a deal and need to draft an operating agreement that outlines responsibilities, profit share, etc. before we obtain our loan and close in the next 60 days.
We have everything roughly agreed upon, so we just need some guidance about best approach and the pros and cons of an LLC vs. LP structure.
We will be purchasing a short term, value add flip opportunity. The partnership will likely be designed for this deal only, as we all intend to take our profits upon a profitable exit post-renovation within 3-9 months.
"structuring an entity for a single-property acquisition with two partners, one being the operating/managing partner, and the other being the silent majority equity partner?"
"We will be purchasing a short term, value add flip opportunity. The partnership will likely be designed for this deal only, as we all intend to take our profits upon a profitable exit post-renovation within 3-9 months."
Generally an LLC taxed as a partnership is advantageous in these situations. Lots of flexibility with the allocations and distributions. Might want a waterfall schedule in there for the capital partner. If the operating partner does flips a lot, he could own his/her partnership interest through an S Corp, if he/she has scaled that far. This will help mitigate the SE tax flowthrough.
Make sure to run everything by an attorney and tax CPA/EA.
"structuring an entity for a single-property acquisition with two partners, one being the operating/managing partner, and the other being the silent majority equity partner?"
"We will be purchasing a short term, value add flip opportunity. The partnership will likely be designed for this deal only, as we all intend to take our profits upon a profitable exit post-renovation within 3-9 months."
Generally an LLC taxed as a partnership is advantageous in these situations. Lots of flexibility with the allocations and distributions. Might want a waterfall schedule in there for the capital partner. If the operating partner does flips a lot, he could own his/her partnership interest through an S Corp, if he/she has scaled that far. This will help mitigate the SE tax flowthrough.
Make sure to run everything by an attorney and tax CPA/EA.
Accountant · Atlanta, GA · Member since 2015 · 1k+ posts · 1k+ votes
7y
Really we need to clarify and say the choice is between S Corp and Disregarded Entity or Partnership.
An LLC is like a chameleon... An LLC can be taxed as an S Corp. It's more accurate to say an LLC is a legal entity -- not a tax entity...at least at the federal level.
The primary benefit of making an S election is the ability to reduce SE taxes by paying out a salary to owner-employees.
If you're above the phase-in threshold for QBID (20% business deduction) and the trade or business isn't a Specified Service Trade or Business ("SSTB") an S Corp becomes even more compelling due to its ability to pay out W-2 salary and influence the QBID.
There are a few other benefits as well as disadvantages to making an S election. Generally S Corps don't start to make sense until around $50k of net taxable income I find due to the additional administrative overhead. Could be a higher level if the owner is already maxed out on SS taxes...
It's usually recommended to have a tax pro crunch the numbers and consult if you're thinking about tax entity planning.
So you're planning to do one flip with someone who funds your project. And it can be for one deal only.
Here is what I would do: buy this property 100% under your "partner"'s name and his credit, and have him hire you as contractor to run the project. No partnerships of any kind.