A couple partners, a couple houses, some cash, a couple questions

[Josh Dehmlow]

I'm thankful for the vast amount of info here on BP. Been a reader for awhile, member for a short time and a new poster.

SO... the Situation: (I will simplify numbers for the sake of clarity)

Partner A (me) has 2 rentals. value of $200k combined (owned, no mortgages) each brings in $1k per month rent.

Partner B has $200K cash. We would like to combine into LLC, purchase 2 more comparable properties (member managed, 50/50) and continue to add properties one at a time from there. Reason: Share risk, expenses, workload, add to portfolio quicker, etc. We have worked together on some other property deals that have worked out well and enjoy working together.

Simple enough goal, but not sure best way to get there from here.

2 main questions...

1. We have agreed that I will continue receiving the current rent until we purchase 2 more comparable properties AND have them rented. At that time everything will be split 50/50 (well, maybe not quite, see question 2 : )

Best way to do this? 

a. Put properties and cash into LLC now and set up special allocation(?) for rent until other properties are purchased?

b. Put cash into LLC but only add properties one at a time when additional property is purchased and rented? accounting for this in the

       contribution section (or other) of operating agreement? 

c. Start LLC with small amounts of cash each and add $ and properties at same time as we go?

We did NOT want to have him buy new properties in his name and then turn around and transfer to LLC later.

2. Best way to handle small compensation for the person doing all the accounting, set up, filing and administration (not that much as we will have an outside property manager) .  

a. Can LLC have small monthly expense paid to the partner handling this as an expense and then 50/50 distribution? or does that negate

       the 50/50 percentage and somehow count as self employment income, employee, manager instead of member managed, etc.? 

    b. Should this be handled by a change in percentage, say 52/48 to account for the extra time, work, etc.? 

    c. Just a simple statement added to operating agreement explaining this temporary situation?

I have chatted with CPA and Attorney, just wanted to do some homework and gather ideas before I do the final set up. Attorney understandably wanted me to purchase the LLC and Operating Agreement set up package before I could get any specific info.

...Bonus question! 

I understand this is a controversial topic to say the least BUT... we are both located in CA. and properties are (and will be) located in Missouri. We have been given different advice from cpa's and attorneys as to whether to form the LLC in California and register foreign in Missouri or form in Missouri and register foreign in CA. We are NOT concerned about the CA franchise fee or interested in wanting to form in another state (Nevada, etc.) for the possible protection reasons, etc. We are leaning toward forming the LLC in Missouri where the properties are located as I have a pretty good network set up there with property management, RE agent, CPA, Attorney etc.

Feel free to weigh in and let the flames fly. lol  

Any and all thoughts greatly appreciated!

josh

[Katie L.]

@Josh Dehmlow

You've raised a TON of issues that I won't be able to comment on all but just wanted to chime in and give you a couple things to think about and talk with your attorney about --- if you do have one partner doing most of the work for set-up and whatnot, giving them a bigger interest in the LLC versus paying them a fee is a big difference. A different percentage gives them a majority voting power and more interest in distributions and profits later down the line. If you do take a fee for such services, you might want to look into how that affects you from a self-employment tax standpoint and look into employee vs independent contractor analysis. If working as an employee, there are additional filings the LLC would need to do as an employer and various penalties for not paying them in timely.

Why not spell out your agreement between you and your partner directly in your operating agreement?  Something to the effect of partner A will get rents of $X until the point of some contingent event and after that event, the partners agree to split profits in the following manner.  I am NOT giving advice here, just a suggestion for your consideration and discussion with your counsel.  Will require more customization on the part of your attorney and maybe slightly higher legal fees but good legal advice is more than worth the cost and you want to have it done correctly from the start.  You can also do special allocations as you mentioned but make sure you have a good CPA if you're going to do that, who understands partnership taxation.

*None of this post is intended to be legal advice nor to create an attorney-client or CPA-client relationship.  Readers should seek professional advice.