Partnership in a Flipping business. Same LLC, or separate ones?

Question

My brother and I are wanting to get into flipping houses. We want to go in together on a deal, but we hear an LLC is a good idea. After hours of research, I am lost. We both have different amount of capital, and different skills. We want to make the agreement on profit a "per project" basis incase one of us has less money/time to invest in the remodel.

Should we both acquire separate LLC's and work together so we can set the terms on a project basis, or can we share the LLC and work that out there?

Aaron Williams · Answer

@Caleb Ray Taxes for us as a multi member LLC was a breeze with our CPA. I'd imagine if you plan to file your own taxes it could be more complicated.

Sounds like it would be beneficial to have an attorney help you write up your partnership agreement. Like @beardybrandon said in his latest podcast...something to the effect of... I'd should have spent a couple extra hundred dollars up front to inspect the pool because now I've spent approx. $16k in pool repairs that I could have negotiated into the deal initially.

Hope that helps!

David M. · Answer

@Caleb Ray

Hmm... so I’m not a lawyer or accountant...  but sounds like you want individual LLC’s with partnerships...  first how expensive is it in your state to open and maintain LLC and partnerships?

So, it sounds like you two need to maintain your own LLC’s.  When a deal comes up, a third entity (LLC probably...) takes Title to the property and your two LLC’s are the owners of that third entity. Your operating agreement would spell out your responsibilities and split.  This third entity would automatically be taxed as a partnership, so each of your LLC’s would receive a k-1 at the end of the year.  You each would have a bank account, and the third entity would also have one.  This also has the advantage that each flip deal you do totally isolates the liability between deals because it has its one LLC.

I suppose in theory you could just have the one LLC which both f you are members.  Somehow the operating agreement would need to be structured so that the split and responsibilities could be assigned per deal legally.  It really only matters what it says if you guys get into an argument and file lawsuits against each other ....

I hope that helps. Good luck

Sean Morrison · Answer

Disclaimer: I am an attorney, but I am not your attorney. This is not legal advice, just friendly information.

All partnerships need a written agreement. Business breakups involving close relationships (like family) are inherently messy and expensive. This is especially true if one is bringing money and the other labor. If you're doing multiple projects, you can create an LLC for each project, or a joint venture agreement.

Keep in mind the tax implications of a partner doing labor in exchange for equity. The IRS taxes that as earned income.

David M. · Answer

@Caleb Ray

Taxes for a multi-member LLC is treated like a partnership at the Federal level by default.  I don't do them, but partnership taxes really shouldn't be that hard for a competent accountant.

Yes, if you trust each other then you pretty much don't need anything in writing, honestly.  Needing it in writing is if you wind up going to court against each other.  Or, it gets in front of "he said -- she said" arguments later down the line...  That's how my attorney explained to me why a single member LLC (in NJ) doesn't need an Operating Agreement.  What do I need to write down to agree with myself?  :)

Caleb Ray · Answer

@Aaron Williams We trust eachother. Would there be a way that we can internally decide how much eachother gets? Like I said, I have more capital, so our first one will be around 30% his money, the rest mine. Im just thinking for taxes and IRS, will they care what the agreement is? If not, I would rather do one LLC and just split 50/50 in the agreement unless we internally decide differently.

Also, was taxes harder to do with a multi member LLC? I heard taxes are more complicated

Aaron Williams · Answer

I started out w/ my brother as well 21 yrs ago. We created one LLC and 1 bank account for that LLC and were both members and signers on the acct. We trusted each other and just kept a good financial records. We were always 50/50 on everything to keep it simple. With any future partnerships, I would definitely create a strong operating agreement w/ defined rolls for each person. The one thing I would think about going into a partnership is knowing that there is high probability that partnership will end at some point in the future. So think about how you both plan to exit and dissolve the LLC in the future and include that in your agreement. I'm not an attorney or CPA nor do I play one on tv. This is just my personal opinion.

Partnership in a Flipping business. Same LLC, or separate ones?

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