I'm starting the discussions on creating multiple partnerships with different partners on different deals, and in different states. Before we set up an LLC as partners, what kind of homework should I be doing? I'm not really sure where to start or what questions to ask to make sure I'm covering myself and to make sure we're making the best decisions as business partners, like if we're setting up the right entity to begin with.
What has your experience been? Any big learnings? Anything you would've done differently? Appreciate any insight!
Get with a CPA and attorney. Understand what each partner will make, how profits will be split, what each will contribute, etc. tax implications for partnership allocations. Legal implications for the operations of the partnerships. You will need a good Operating Agreement. If doing business in multiple states, then understand that you will have state tax filings and need someone on your team who can advise accordingly.
@Kristen Nguyen - my business mentor likes to say, "Consider....the Best Case scenario, Worst Case scenario, and What Most Likely will happen." If you can live with all three, then proceed. Most tend to live only in the Best Case scenario world. So when you are considering a partner or the LLC structure, poses those questions to you and your attorney. What happens if this explodes in a good way. What happens when it explodes in a bad way. Do you have a means of addressing both scenarios. These are ways to ask your self - do you trust them, and how much do you trust them.
@Lance Lvovsky thanks!
@Scott Krone great points! thank you!
Hey @Kristen Nguyen - I'm your 'neighbor', in SF East Bay.
I'd reiterate the comments above, particularly in thinking about bad cases. When you're talking about an LLC/partnership or other joint venture, there are some key provisions that are most likely to cause friction if not understood from the beginning. I'd recommend that you at lease conceptually cover these items below. Your professional advisers can document this as needed, but you should understand:
- Business Plan. What's the full business plan for operation, how certain is that plan, and what is the timeline.
- Control. Who controls the decisions of the company? Do all partners vote for all decisions? Does a "Manager" carry out day-to-day at her discretion, but other partners vote on "major decisions" (such as a sale)? If there are votes, how are they determined (one person, one vote? or is it based on the percentage of capital contributed?)
- Capital Contributions. Who is responsible for contributing what funds? When are contributions to be made? What if, down the road, additional contributions are required to operate the property, are partners obligated to fund additional contributions? If they are so obligated and don't so fund, what are the consequences (dilution, buy-out, loss of voting)?
- Transfers. What happens if one partner wants out? Can they sell their interest? Is there a right of first offer?
- Distributions. What is the basis for calculation of distributions, what is the timing, and what expenses are deducted prior to distributions.
Always happy to chat REI, and best of luck.
The couple of things that were the hardest for us to come up with were; 1) How to value the properties in the event of a buy out or death of a member 2) What would be the options for the heirs in the event of a member passing away - stay in as a silent partner (no management needed) or be 'cashed out' and what would the terms of that cash out.
On of the partnerships is a 50-50 and the others are 33-33-33. In the 33s (or say a 51-49) there are no 'tie votes' :-)
@Kristen Nguyen seeing as you life in the Bay Area it’s not surprising you want to go the out of state route.
My suggestion is don’t go out of state and definitely don’t make different partnerships with multiple people in multiple states.
I did this in state with a local person and it lasted 6 months (and ended amicably). The reason it ended was he lost interest in real estate and his life circumstances changed.
Lesson is you can’t control what others do. You’re gonna have multiple other people who’s life circumstances could change. That’s a lot f moving parts. Proceed cautiously
@Kristen Nguyen Would talk with a business attorney to get as much information as possible. Have a good one in SF who is also in real estate. Best learn all the nuances so you’re protected.