Hoping to get some input on the best partnership structure for my situation. I'm investing with a friend that lives in Utah, and I living in California. We plan to acquire 2 townhouses in Utah by the end of 2018, and are 50/50 partners. We have been looking into setting up an LLC in Utah; however, from my understanding, I would also need to register this LLC in California.
Is setting up an LLC a good idea, or would you suggest we take a different route?
Recently I went to an investor meet up where we talked about this. I will relay what was said there. There are two types of LLCs. A single LLC and a dual LLC. A single LLC means that it's owned by a single person like the name implies and on your taxes it shows up the same way it would if the property was in your personal name. The dual LLC is co-owned by two people as in a partnership. While having a dual LLC will give you the legal protection you need, there are some drawbacks for the person that carries the mortgage in the partnership. Because the properties financials are distributed 50/50, the way the property performs will also appear to be only half as efficient. This can become a problem if that person wants to acquire additional mortgages. What we were told to explore to avoid that problem is a joint venture. We were also advised to meet with a CPA and a lawyer and make sure they can work together to get you the best legal protection and best tax situation. I'm meeting with my lawyer and CPA this week to set up a 50/50 partnership and will post what I learn here. I don't have any idea how you will have to deal with California laws. Best of luck!
Hi @Stu Owens ,
Congrats on wanting to acquire two townhomes in Utah by 2018. I think the answer would depend on your net worth and appetite for liability.
I hold my SFRs in my personal name, and used LLCs for a 40-unit and 98-unit. If you decide to do a 50/50 split in an LLC with your friend, you will very likely have to pay $800 per year for the CA FTB fee. You should account for this when running your numbers.
You could also hold it in your personal name in as Tenants In Common with umbrella insurance.
@Stu Owens Congrats on your soon to be investments! Based on the info you've provided, why wouldn't you just go into each property as TIC and both you and your friend each own 50% of each property? This makes it much easier to divvy up income and expenses and later if you or him wanted to get out of one or both properties, there is less mess. Putting them into a LLC (or each into their own) creates extra cost (tax and lawyer fees), and you are by definition investing in the LLC which then owns the property(s), not investing in the properties directly. Consult your Tax Pro!
You could do this several different ways. And it depends on a lot of different variables as well. Is your partner a family member or other trusted long-time friend? Will the properties have mortgages? Will you be performing equal duties? Putting in equal amounts of money? Are you worried about the stability of your partner in terms of marriage or finances? What about liability concerns from tenants or creditors?
You are right that if you created a UT LLC, you would need to register it as a foreign LLC in California and pay the $800 minimum tax to CA. Alternatively you could create a CA LLC and register it as doing business in Utah. You will now need to pay income taxes in Utah for the income you earn from your rentals there.
Having a formal entity allows you to have a written agreement laying out all the decisions both of you will make and the roles you will play with regard to the properties. It will describe which actions will need both of your approvals and which actions one partner can do on behalf of the entity. For instance, do you want to restrict your partner from being able to encumber the properties? Is there a dollar amount of expenditures you want to require unanimous approval? You could also draft a sort of tenants in common agreement if you wanted to avoid a formal entity, but that gives you no liability protection. If you are going to have debts attached to the property, you will want to make sure to watch out for any due on transfer clauses, or be ready to personally guarantee any loans taken out in the name of the entity. Will you also be using the entity as a property manager for other properties or want an entity name for tenants to be able to write rent checks out to?
If you need lawyer or accountant names in San Diego, let me know. Good luck!
*This post does not create an attorney-client or CPA-client relationship. The information in this post is not to be relied upon and readers are advised to seek professional advice.