When do you Create an LLC with a partnership/self-owned property

Question

Hey guys,

When do you guys create an LLC when you want to create a partnership? Do you do this before a deal or during the deal (in the beginning or at the end?)

Also, when do you guys create an LLC when you're going solo? (beginning/middle/end)?

Thank you guys for your input,

Jesse

Costin I. · Answer

@Jesse Daconta Read these to learn more about partnerships, JV and how to prepare for them:

- effectively-conduct-joint-venture-agreements-as-a-real-estate-investor

- how-do-i-properly-construct-a-purchase-with-a-partnership

- create-an-llc-for-first-partnership-best-way-to-do-so

- taking-on-partner-s-and-limiting-our-liabilites

As for going solo and LLC, you need to have something to protect first. Here is a diagram to help you with this question:

Account Closed · Answer

In a partnership you are legally responsible for all partners actions. If the partner lends his car to someone who gets into a wreck you can be sued.

In a joint venture you are a separate entity lending money or expertise to the project. You are far less likely to be responsible for actions of the other party.

Anthony Wick · Answer

@Jesse Daconta  I still own my own properties under my own name, without an LLC. I have an umbrella liability insurance policy that covers those properties.

This month I formed an LLC with two partners. We hired a real estate attorney to write up the Operating Agreement and Buy/Sell Agreement. First, the three of talked about our goals, exit timeframe, amount we would each buy into the LLC for (shares), etc.

And now, we just found a property and are under contract to purchase. We will also open a separate bank account for the LLC for the shares we have each purchased.

When dealing with partners, whether best friends or not, have everything in writing and filed with the state before you buy anything. Also, my attorney and CPA told me it is not necessary to have a separate LLC for each property. As always, seek the advice of professionals when dealing with such complicated matters.

Jonathan Herron · Answer

@Jesse Daconta there are different reasons to set up an LLC (or other business structure) at various stages of a deal.  Some people prefer to set them up at the beginning, others at the end, and others after they decide to stick with a business/investment.

The most important thing I tell clients is when forming the LLC think about what happens if things go bad when they are still good.  If there are multiple members I make sure to include dispute resolution in the operating agreement.  (What to do if the owners are evenly split about a decision.)  Doing this when the relationship sours almost never work but having the structure in place from the beginning helps the business operate.

I also generally advise all clients forming a business entity to consider the exit plan.  Do they plan to sell in the future, buy/sell agreements between owners, etc.

Adrian Jackson · Answer

"EXIT STRATEGY". A strategic plan should be in place for the dissolution of your business relationship. Seek legal advice from a licensed attorney regarding the formation of your business entity. A real estate professional is NOT the best person to ask for advice pertaining to the formation of your business. As an experienced entrepreneur, partnerships are very difficult to navigate. Regardless of the strength and duration of your relationship, MONEY complicates everything. It's almost certain you will eventually have disagreements which may ultimately force you to part ways. An experienced attorney will be able to help you with an agreement that protects and benefits YOU and will include an exit strategy. DO NOT USE the same attorney as your partner. If you have any questions regarding entrepreneurship please feel free to contact me.

Warm Regards,

Adrian Jackson

RE59

Jesse Daconta · Answer

Account Closed

I can see how that would be troublesome. Does a JV have the same protections as an LLC?

Thank you for spending your time to educate me!

Jesse

Jesse Daconta · Answer

Account Closed Thank you for your reply!

I'm having a hard time figuring out the difference between a partnership and joint venture (JV). In a JV do both people create a single LLC or do each of them have their own LLC that owns a part of the asset?

Thanks again,

Jesse

Account Closed · Answer

First, don't do a partnership. Too complicated and usually ends with someone being upset. Instead do a Joint Venture for each property. Umbrella insurance is best when you only have a few properties. When you get several it is worth looking into setting up an LLC. Each person in the Joint Venture can have their own LLC or not. Now, the most important point: "buy some properties!" None of that other stuff matters until after you are in business. You can even do your first property without even thinking about the other stuff.

Jesse Daconta · Answer

@Anthony Wick

Thank you for sharing your experience with me! I'm happy to hear that you found partners you can trust and go into business with. I also agree that whether you're best friends or not that you absolutely need to have everything in writing. Hopefully, I'll be as seasoned as you one day with the whole process. It's interesting that you don't have an LLC for each property. Do you have a large umbrella policy to protect you from most liabilities (I'm inexperienced and am not sure about the specifics of an umbrella policy. I just know that everyone recommends one because it's relatively cheap for great protection)?

Thanks again for your post,

Jesse

Jesse Daconta · Answer

@Costin I.

Wow... I appreciate the time you put into this response. I will read every article you have sent. The flow chart is amazing as well. Thank you sir...

-Jesse

When do you Create an LLC with a partnership/self-owned property

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