How to structure a business with multiple investors or partners

Question

I currently work a W-2 job with several other coworkers who are interested in real estate investing. My goal is to figure out the best way to structure a business that includes anywhere from 2 to 5 members. Ideally, I would like to start and run my own business. However, since I am new to real estate investing and have limited capital, investing with others seems like a good (best?) option. Also, I should mention I live in CA. I don't know if that'll make a difference as far as business laws are concerned.

Is it better to form my own LLC and have my coworkers (investors) invest in the company or should a business entity be formed that includes all 2-5 members, each with equal share in the company?

Please feel free to ask any questions if my situation is unclear.

Thanks guys!

.

Is it better to form my own LLC and have my coworkers (investors) invest in the company or should a business entity be formed that includes all 2-5 members, each with equal share in the company?

Please feel free to ask any questions if my situation is unclear.

Thanks guys!

.

Roy N. · Answer

Account Closed who told me "three" is the magic number.  As you grow above that number you venture into the realm of securities (SEC) and the required paperwork (and costs) to do your deals will grow.

All partnerships end.  Spend the upfront time and $$$ to have a solid partnership / operational agreement drafted by a qualified attorney before any money changes hands.  This agreement should set-out not just the responsibilities and duties of partners / shareowners during the "good times", but should also lay the ground work for how a partner/shareowner may leave (or be pushed) - who has the first option to buy our the interest, can it be sold to an outsider (and does that required majority or unanimous approval of the remaining partners/shareowners), etc.   It should also address how the venture should be wound down when the time arrives.

Bill Gulley · Answer

@Roy N.

Account Closed

Good memory Roy, yes I mentioned keeping partnerships to 3 initially funding a project in one company as that is sure to keep you out of the SEC issues.

If you have Dave and Bob in ABC LLC, they can admit CDF LLC as a member where Frank, Abby and Rick are members. ;)

A series LLC is probably the best structure from an operations side as you can have many cells and all the cells don't have to be involved in a project, or, they may as each cell is a mini LLC within the series but using common tax returns, general bank account and operating agreement, with each cell accounting for its own business. See an attorney as these are still new without much historical court action, but they should be treated the same as any LLC from what I've read.

Yes, any LLC must have an operating agreement.

Before jumping off trying to get in the corporate world, ensure you know real estate, you can have 10 people owning as tenants in common personally with a TIC agreement and liability concerns on a dwelling are probably less than driving you car. Good management keeps you out of trouble. Personal ownership won't be seen as a business venture as a company entity will be.

Account Closed · Answer

@Roy N. Thanks for the quick response! I didn't even think about the SEC aspect so I'm glad you brought this up.

If I was to start a business as the sole member and "partner" with others on a deal-to-deal basis for extra capital do you still need to draft an operational agreement or is there another type of contract used for that?

It seems like this is a better route rather than having a multiple partnership business entity in which the partners would be involved in every deal.

Bill Gulley · Answer

A TIC will have a TIC Agreement, pretty much like a partnership, how profits and losses are accounted for is by the agreement, how a lender requires guarantors is up to that lender, unlike a general partnership the TIC borrower is responsible, they may pledge only their interest so that doesn't fall on all owners, say in an apartment complex. On a single family home, all owners would be required to sign the deed of trust or security agreement, all do not have to be on the note, but they usually will be. A TIC interest in a SFD isn't very marketable for collateral. (That can be a good or bad thing, depends).

The TIC is under individual names, but a business entity can also join in on a TIC, or a Trust.

On a SFD I'd suggest you limit any TIC to 3, it would be better to have others wear a different hat, like a contractor or lender or manager. The TIC may create liens to secure other parties' interests. Not really a DIY project, see your attorney, but technically you could have an unlimited number in a TIC ownership, question is, why in reality and making things so convoluted won't look good to any lender. Don't make it look like it takes 5 parties to do a deal, that says no one can carry the deal alone, at least on the surface, it's just a house, not the Empire State Building:)

Austin Mudd · Answer

@Bill Gulley @Anthony Angotti Bill, would it make more sense for 5 partners to get into a rehab or rental deal as TIC? Are profits and expenses accounting for similarly in a partnership agreement? When mortgaging a property, each TIC has a % ownership in the property and % of P+I they are responsible to pay to the lender correct (while responsible for other TIC's share of payments). In a partnership (unless it's a LLC) one partner has to take the property in their name and they are responsible for 100% of any debt payments, is this correct?

How to structure a business with multiple investors or partners

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