Best Structure for Partnership?

Question

Hello all,

What is the fairest way to partner with someone with the following situation? Two friends want to purchase a rental property together. Both have capital to invest, but one person is going to take on 100% of the landlord duties. The other partner will just be a financial investor. Neither of us are sure how to structure the LLC or what this should look like. We want to make sure it's fair because we don't want to hurt a friendship over it, so we really want to have this buttoned up before making a purchase.

Does anybody have any recommendations on a structure that could work for this situation?

Bruce Woodruff · Answer

Split profits equally. The manager should invoice the LLC company for his time and any supplies

Basit Siddiqi · Answer

Offer a guaranteed payment to the LLC member who will take on management responsibilities.

Chris Levarek · Answer

@Joshua Steven Ferrell The financial investor has it easy. Either bake in the property management as an expense(paid to one of the parties) or be sure the partnership compensates for it with extra ownership.

Let's put it this way, one side of the party after close gets to be passive. One side of the party will be working their tail off daily forever, until the property sells of course or new management is put in place.

The financial investor has it easy.

That being said, 50/50 could be good if neither side is experienced. Both are learning. Make sure you plan an exit of the deal, what will happen if you disagree and clear accountability. What happens if the A/C unit breaks, who will pay? What happens if revenue is below expectation, and more capital is needed? Write these things in there with an attorney.

Robin Simon · Answer

I would bake in a management fee and separate management agreement where the landlord partner gets basically a salary or preferred return for the management duties, but with the flexibility to change the arrangement to a new manager if needed w/o messing with the ownership structure.  Go 50/50 or pro rata on ownership percentage and capital contribution

Scott Krone · Answer

@Joshua Steven Ferrell - ultimately the answer to your question is, "What each of you think is fair".  Some have suggested 50/50 split, and having management as an expense.  Valid points - if you are both contributing the same amount of equity.  Which leads back to my first point, if the equity is 70/30 split, but the 30 is doing the management, then perhaps 50/50 works IF both parties agree.  As my mentor once told me - it has to be a win win situation.  Once you agree, then don't question the deal.  You were happy going into it, then be happy exiting it.  You can always evaluate the situation on the second property if you choose to move forward with a second one.

An attorney will outline all the ways it can be divided.  How you do it will come back to you and your friend.

Sergey A. Petrov · Answer

Agreed with all of the above. I am not an attorney or a tax professional but from what I know do not form a corporation (whether it is a C Corp or an S Corp) for the purpose of holding real estate. A multi member LLC (aka partnership) is the way to go. Do have an attorney draft a partnership / LLC operating agreement. The sole purpose of that entity will be to own and operate the property. To the extent individual partners provide services to the property / entity (management or otherwise) they should be treated as independent third parties providing the same services and getting paid for those services. And through the process of making those decisions you and your partner might find that the LLC (this is the keyword - what is in the best interests of the LLC) may be better off actually hiring those independent third party professionals instead of having partners do the same thing 😁. Unless of course those partners bring the same level of expertise that others would bring at similar rates

Ryan Moyer · Answer

I think other people have nailed it already.  Just treat yourself as a 3rd party manager making whatever agreed upon percentage that is taken out as an expense, and split the leftover 50/50.

Bruce Woodruff · Answer

Check with your local attorney. But generally speaking, LLCs are more geared toward Real Estate, whereas S Corps etc, are better suited for a typical business like construction.

Chris Seveney · Answer

This is more a question for the attorney on how its structured and how taxes would be handled - typically though it is run as a LLC.

Best Structure for Partnership?

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