Which Type of Legal Entity to Become?

Question

My Son and I are partnering to do RI.

He is an excellent General Contractor with great credit rating (super smart... :-) )

I have high income, low debt, analytical, detailed and good computer skills.

We both live in Northern NH but I work in Arkansas and commute home to NH every 3 weeks.

I have purchased a RI property in AR and we ware looking to buy in NH.

What type of legal entity should we form? LLC?, ???

Thank you for any replies... :-)

Scott Smith · Answer

Hey Charlie,

The most common way of proceeding with with the LLC. The most common ways to partner up on deals is either an LLP (less functional, but still offers some liability protection,) or the LLC (more functional and arguably stronger protections.) One good resource on the topic is this article on Joint Venture LLCs. You can operate the investment through it's own bank and EIN, and should something happen that causes legal action you both should be legally protected as long as you formed the document correctly and have proper bookkeeping.

Biggest pointer I would give is to be sure to come up with a strong operating agreement when investing with family that will outline how the investment be handled in different circumstances: if there is a family crisis or the investment isn't working out there is much less stress if you already have a course of action agreed upon in writing.

If you think you may go into multiple deals together in the future it may also be worth looking into a Series LLC.

Best of luck to you moving forward!

Charlie Gould · Answer

Thank you Anthony and Brandon, appreciate the comments...

Brandon Ingegneri · Answer

You’ve got to talk to an attorney and Cpa but an llc is the simplest and cleanest way of structuring with the least amount of distribution ramifications. If you grow into a more complex business, you may then convert to an S Corp, but the ease and flexibility of an llc is excellent for a start up.

Anthony Dooley · Answer

You could form an LLP. This would limit your business relationship to the real estate investing business and would not allow one of you to be liable for the debt or liabilities of the other. If you buy and he renovates, I would just treat him like a contractor and pay him for his services. This is a business expense for you. His business is renovation/construction, not REI. Having a partner complicates things, in my opinion. If one of you die or become incapacitated, then your wife or heirs would be the new partner(s) by default.

Ray Fisher · Answer

go to sec of state website and you can set it up for about $50 in Arkansas, I have 3 different entities set up .

My education came from a lawsuit , $25,000 in legal fees and first thing I was told is we don't need to do anything with out an llc.

Charlie Gould · Answer

Thank you Daniel, good advice...

My son’s account and attorney both said LLC...

Daniel Hyman · Answer

Before you create any entity, it's highly recommended to consult with an attorney and a CPA.

Much stress has been endured by folks who hastily created entities without consultation regarding the legal and tax ramifications.

Charlie Gould · Answer

Thanks Ray, that is the same thing my son is hearing as well...

Ray Fisher · Answer

LLC worked for me, plus personal Asset Protections