Should I make an LLC for my partnership?

Question

My business partner and I are interested in house hacking together for about a year before moving out and renting out the property entirely. I would like to know if we should form an LLC given our situation. Of course, we will have a contract that has terms we both agree upon, however, I am unsure if an entity like an LLC should be established as well.

Thanks!

Kory Reynolds · Answer

I say hold up - depending on what state you are in, you could be triggering minimum fees to protect yourself from liabilities that could be protected from with a good insurance policy. IE CA has an $800 LLC minimum fee, NH $100, MA $500.....and many many other states. But go with just joint tenants and a good insurance policy, and state pending the fee is avoided.

Ethan McRae · Answer

@Sachin Amin Excellent. Thanks again this is a great help.

Sachin Amin · Answer

i have used legal zoom and incfile both are pretty good. and yes formal 50-50 agreement based on mutual understanding. we have business account (joint) where all the rents come in and all the expense are paid out - we use that as single channel for our year end taxing - as we grow the # of units things are getting tricky so we started using STESSA - still exploring

Ana Klein · Answer

@David M. has a really great point! LLC's are for asset protection and if you don't treat it as a business and have a separate bank account and start co-...mingling funds you are piercing the corporate veil and well. there goes the LLC protection.I would advise you to seek a consultation with a lawyer. Partnerships are always great until something goes wrong and there is no contract.

Sean Morrison · Answer

According to Google, every state has at least some homestead exemption, except New Jersey and Pennsylvania.

David M. · Answer

@Sean Morrison

Any chance you know how many States have the Homestead exemption for their taxes?

Sean Morrison · Answer

One point that is often missed - homestead exemption. If this is your home and you put it in an LLC, depending on your state you may lose your homestead exemption. That could potentially be a larger cost than an insurance policy.

Ethan McRae · Answer

@David M. Thank you so much this is a great help

David M. · Answer

@Ethan McRae

Joint tenancy is a "type" of ownership for owning property.  When you take Title in the two of your names, it will be in joint tenancy (I am assuming your State has such a tenancy type --- I only know NJ).  So, its not something that you make an application.

Yes, you really should have an experienced lawyer look it over.  He or she will probably come up with a few more "scenarios" that will need to be spelled out.  Just as another way to look at it:  if everything goes "right," you two won't need that piece of paper since you will both be "happy."  The agreement/contract will become valuable when the deal isn't going quite "right" and you two have a disagreement.  If the agreement was written in an "all encompassing" manner, then it will resolve any dispute the two of you may have in the future.  There shouldn't even be "hurt feelings" (probably will be) as you two would have agreed upon the terms ahead of time.

If you form an actual company (e.g. partnership or LLC), then the contract that you are referring to will be the 'partnership agreement' or the 'operating agreement.'  If you guys don't move forward with a business entity, then it will be some sort of contract/agreement between the two of you.  Again, a lawyer would be best to consult on this matter since you want to create a legally binding agreement between the two of you.  It needs to conform to your State laws.  Remember, you are trying to prevent having a lawsuit because on of the two of you gets really pissed off.

I hope that helps.  Good luck.

Ethan McRae · Answer

@Kory Reynolds ,

@David M.

Thanks for this guys. Very helpful.

Forgive me, I am not very familiar with RE law or accounting, but would the written agreement be filed as part of the joint tenancy, or would the written agreement be something completely separate?

Also, I have a pretty good idea of what I would want to include in the written agreement, but would you recommend we have our agreement just looked over by a lawyer as well?

Lastly, how do I go about filing a joint tenancy? How do I start that process?

I know this is a lot but I really appreciate the help. Thanks

Should I make an LLC for my partnership?

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