Washington State - What's your preferred partnership setup?

Question

Investors of Washington State! How do you prefer to setup partnerships for your investments -- is it through an LLC, LP, or something completely different? Are there some unique state laws and regs that make one kind preferable to another?

Steve Vaughan · Answer

We have an LLC with all my family as the members since WA has no age minimums for members.

Because our 2 boys can own 2% each, it keeps my wife and I from owning 50% each safely.

If you sell less than 50% in any calendar year - no excise tax.

We are set up to sell our commercial LLC properties excise tax-free if done right.

LLC membership also educates kids about business ownership. My 12 year old has owned apt buildings since he was 1 week old.  Their k-1 income flows directly into mutual funds, teaching them about investing.   I've been able to pull them out of school to go to closings.  Pretty cool!

Brandon Wieschhaus · Answer

@Kevin R. has a good point about the financing, so you would need to chase that to ground, but all other things considered, I would do it in an LLC every time.  The insurance policies don't discourage frivolous lawsuits the way a properly set-up legal structure can.  The point of having a good legal structure (IMO), is to provide the best tax benefits, and the best legal protection, but you SHOULD be doing the setup work with an attorney.  I recommend Anderson Business Advisors, but I'm sure there are others who are "on the level" (not all attorneys are!).

Andrew Ellis · Answer

@Steve Vaughan You just blew my mind with that family LLC idea!  I’ve got a huge lightbulb over my head right now, it sounds like a perfect setup for my family too

Wes S. · Answer

@Steve Vaughan very interesting idea on that! Thanks for the tip.

Nghi Le · Answer

I've done it in three ways for flips:

1.  LLC - both partners would be on title

2.  JV Agreement - one or both partners can be on title (in their separate names/entities)

3.  Promissory Note & Deed of Trust - the capital partner can just have a lien against the property, while the other partner is on title.  You can state the return the capital partner will get in the Promissory Note (even a percentage profit split).  Note that some hard money lenders don't like having junior lienholders.

Wes S. · Answer

Thanks for the insight! When it comes to working with a partner though, is it common to do that through some kind of Limited Partnership, or simply by means of a contract? And are there any Washington State specific concerns when it comes to this?

Nghi Le · Answer

That sounds more like a lender than a partner.  For my private lenders, I just pay at the end of the loan term or when the project is completed, depending on how it's structured.  I haven't done any monthly payments in the past couple of years.

Wes S. · Answer

@Nghi Le That's great, exactly what I was wondering. From a nuts-and-bolts perspective, how do you pay out your partners? Just in a monthly transfer from your bank account?

Wes S. · Answer

@Brandon Wieschhaus thanks for that suggestion!

Kevin Romines · Answer

@Wes Stange From a financing stand point, if you want Fannie Mae / Freddie Mac financing to get the best terms and rates, then you need to buy or hold the properties in your personal name. If you do that, I would suggest that you max. out the liability coverage on your landlord policy and follow it up with an umbrella for 1-5 million.

If you decide to hold or buy them in an entity, you will be forced to finance them through a portfolio or commercial loan. In that case, your best bet is to call all the local community banks and see what their portfolio/commercial terms are? I would also try some credit unions as well.

I would still recommend that you max. out the liability coverage's on the polices, depending on the insurance company though, they may allow you to have a personal lines policy or some may force you into commercial. Shop around there as well.

Good luck, happy investing!!!

Washington State - What's your preferred partnership setup?

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