What is the best way to form a partnership? Form an LLC together?

[Karen Warren]

I have a friend living in NYS. I live in NC. We are talking about buying rental property together in NYS. What is the best way to buy property together? Form an LLC?

[Brian Schmelzlen]

Hi Karen,

If you are buying property with someone else, by default you are in a general partnership.  You do not want to be in a general partnership.  You would be totally liable for your friend's actions or liabilities (if your friend gets sued and the other party can tie in the investment at all, you could be sued even though you had nothing to do with it).

An LLC is probably the best best for what you are looking to do. You will want to discuss with a CPA or an attorney what state to establish the LLC in (the state you invest in, NY, or NC).

You can write the operating agreement yourself to save money, but you may end up regretting it. You need a strong operating agreement that covers all contingencies. I am sure that you and your friend can work well together, but one of the advantages of having a strong operating agreement is that it can resolve conflicts before they occur. A good operating agreement will discuss what happens if you both need to contribute more money to the business (what if in 3 years you need a new roof for your investment property, but the LLC does not have enough money in it to cover it); what happens if only one of your is able to contribute money to the LLC for an unexpected situation; what happens if you have a serious disagreement about the direction of your investment (what if one of you wants to sell the rental but the other wants keep it); what happens if one of your expectedly passes and the other is now partnered with the spouse or kids of your friend; etc.

I know you would rather save the money (who wouldn't), but it is a deductible business expense and may save you a lot of headaches later.