Partnership Legalities

8 Replies

I'm new to real estate investing and would like to start flipping in the Northern Virginia area. If I were to partner with another investor, whether it's a friend or someone I meet through a meetup, what do I need to do to make sure the partnership structure and details are outlined properly? Do all partnership agreements need to go through a lawyer, or are there customizable contracts/agreements from LegalZoom or some other online resource that I can download and use? At what point do I need to think about forming a LLC?

Total newb here, so any insight on the legalities and best practices would be appreciated!

Thanks!

Stacy

Generally speaking, I would not recommend using LegalZoom. The problem with LegalZoom is that the documents are not custom tailored to your particular business plan or business model, and do not necessarily adequate shift the risk where it needs to be. My recommendation is to seek out a Business Attorney in or around Fairfax to help you create an agreement that works best for you. Although the initial cost is higher than plugging some info into LegalZoom, the end product is likely to protect you far more in the event of a dispute.

Invest in yourself, get a lawyer, and have a good document drafted. It is a good idea to have the operating agreement in place prior to getting financing, signing any contracts, or buying any properties. 

DISCLAIMER: The above is for basic educational purposes. For more information, seek out a local attorney.

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Originally posted by @Stacy Weng :

Thanks @Matthew Kreitzer, this is really helpful! Would the operating agreement also be used for tax purposes, when determining the taxable amount?

 That is more of a question for a CPA than it is for an Attorney. You do raise an interesting question though; may an Operating Agreement shift the cost of business such as taxes to one or more of the partners. That may raise some red flags in Virginia if you're not too careful about doing so. Even if the IRS doesn't limit such a practice, you may face some problems down the line if someone decides to sue the corporation and try to pierce the corporate veil claiming "alter ego". There are also issues of making sure the accounting is done properly and neither party defaults at any time. Failure of one party to pay taxes may mean you could be on the hook, and if you don't pay the IRS you could get in trouble. Definitely a possibility best discussed with counsel.

You may want to seek out a CPA as well.


Disclaimers: Prior disclaimers incorporated by reference. Additionally, none of this information should be viewed as tax advice, and for the preparation of taxes you should have a CPA help.