Separate LLC's with Ownership into a Partnership

[Anthony Surico]

Hi BP Community! 

My buddy and I, both 25, have worked closely over the past couple of years on different non business activities for the community and we are looking to join together to form a business relationship with the goal of buy and hold rental properties for extra income as we both have steady full time careers. I am an investor in New York and he is based out of Alabama and we are looking to form an LLC down in Orlando Florida. We both plan to put up 50% of the equity and have defined roles and responsibilities of each party.

With that said, does it make more sense to form two separate LLC's, one in his name and one in mine, with equal ownership into a separate partnership? Or, since we are just starting out, does it make more sense to form a joint LLC under both of our names and later, if the situation arises, form separate LLC's, each with 50% ownership of the joint?

Clearly with any business relationship, there is always the potential for members of an LLC not to agree and things to go south. Where we don't feel that this will be an issue, the thought in such a structure arises based off the idea that one of us may want to do a deal with an outside investor that the other may not agree on.

I appreciate all thoughts on the matter as we are looking to structure our first business. 

[John Kent]

Originally posted by @Anthony Surico:

@Jonathan Twombly. Thanks for reaching out! When you are talking about LLC agreements and some of the language that needs to be used, is this something that would be part of the "operating agreement" or are there other forms that need to be filled out?

I don't believe the state of Florida makes it mandatory to have one in place so how would I go about "legalizing" such document once the two partners agree to the terms? Would this just be a matter for a notary? I've found a couple templates online but I want to make sure we set this up properly. 

The LLC Operating agreement is where that language goes. You will definitely need one if you are buying real estate from banks or with bank financing. Have a lawyer who specializes in business formation draw up the Operating agreement. This should not be done without the requisite knowledge when forming a multi-member LLC. Be sure to work out a general framework with your partner on how important issues should be considered which you can provide to the lawyer so important considerations aren't overlooked or assumed.

Should you decide that separate LLC's are preferable you can always buy individual properties in a property specific LLC or with a Tenants In Common title splitting the ownership interest of each LLC on title.