Best Practices For Structuring Partnership

[Todd Chandler]

My wife and I are Realtors and have completed two fix and flips and are about to start on our third.

We have an investor and his wife who want to fund a fix and flip as silent partners and split the profits from the project while my wife and I will provide the sweat equity.

Our investor and his wife have a new LLC that they intend to run their real estate investments through, and my wife and I have an LLC that we run our real estate business through.

We have never done a partnership deal like this and have a few questions:

1. Would the best practice be to form a new LLC where all four of us are managing members?

2. Should we open a new bank account in the name of the LLC that the other partners would fund?

3.   Should the purchase of the property be made with funds from the new LLCs bank account along with all other expenses?

4. Once the property is renovated and sells, do the proceeds come back into the new LLC and then are distributed from there to each couple's existing LLC?

I know that this is a lot, so please let me know if I need to clarify anything.  I am looking for best practices both from a legal protection standpoint and from a tax advantage standpoint.

[Brian Fung]

Quote from @Todd Chandler:

Thanks Brian!

There will be no lender or loan involved in this deal.  Our partners will be bringing cash for the entire deal.

 Aloha Todd, 

Awesome that you have partners. I tend to categorize investors into 3 groups: 
Group 1: Too much deal flow and bandwidth but not enough money - (Lending is the key to this group's success/scalability)
Group 2: Too much money and not enough deal flow - (All cash investing is the right decision). 

That said, if you're partnering with people for expertise and sweat equity it makes sense to partner. If you are partnering with them for their cash, then partnering for that purpose is likely more expensive than financing if you actually execute according to your plan. If that is not found to be true, then I'd be weary of the entire deal and its profitability altogether. 

We always offer to do strategy calls to go over numbers with our clients to take an objective approach on whether it makes sense to finance or not. Either way, I hope this is helpful. Good luck! Aloha.