Multiple companies a conflict of interest?

Question

Hello all.  Here is my prob.  I want to start a company for buy and hold and possibly flipping properties, once the market gets better.  The 2 people in charge of this company will be me and my sister....Let's call it Company A.  I also want to do investments with my wife a few years down the road and we'll call that Company B.  My sister does not
want to form Company A if Company B has a strong possibility of happening.  What do you all think?  Is she in the right?

Chris Martin · Answer

While I don't have a lot of information to go from, you state "...the main reason for doing 2 entities is because my wife and sister's opinions vary and I didn't want any bickering between the 2".

You can experience conflict contention on multiple fronts... like property selection, your management time, capital contributions, asset resource allocation, etc. I understand your sister's concern since as a member of Company A, your (future) involvement in Company B may impact your contribution to Company A. That's probably why she says any RE purchases "...should be purchased via the LLC we create...". I find this too restrictive, but rooted in her sense that Company B will drain resources from Company A.

There are ways to eliminate conflict and contention. For instance in property selection, since their opinions vary, define the target properties in enough detail to avoid Company A and Company B competing in the same 'space'. An easy example: my LLC is (by operating agreement) generally prohibited from buying property built before 1978. There would be no property selection conflict if I were to also be a manager of an LLC that exclusively buys LBP remediation projects. If you can define the member's roles in each of the other potential conflict areas (e.g. management time, capital contributions, asset resource allocation(s), etc.), your sister may realize that Company B, if it ever exists, may not impact Company A. As you know, the operating agreement spells out a lot of this stuff. It is a difficult task, but worth the effort to make Company A and Company B successful.

Bruce M. · Answer

Awesome Awesome idea!! Thx Chris!!  Thx for giving me ideas w/o know much about any operating agreements.  Heck we don't have any agreements in place yet and this discussion really helps in giving an idea to get that verbiage in there.

Bruce M. · Answer

Thx joel.
Chris, neither LLCs are formed at the moment...we're still ironing out some scenarios before we agree to anything.  Chris do you have some ideas where it will  or will not be a conflict of interest?

Chris Martin · Answer

Without seeing details of the operating agreements of both companies, it is very hard to tell what potential conflicts there will be.

Bruce M. · Answer

Thx bryan, the main reason for doing 2 entities is because my wife and sister's opinions vary and I didn't want any bickering between the 2.  I may be wrong but I don't believe they wanna do biz with each other either.  My sis is saying that any real estate I purchase should be purchased via the LLC we create (if I agree to), unless it's a personal residence or vacation home.  Does it sound like my sis is too involved in my home life where she is placing these stipulations before agreeing to go into business with me?

Joel Owens · Answer

It is a TRUST issue. Partnerships have a high chance of failure.When you involve family they have a REALLY HIGH chance of failure.

The reason is many can't separate family time and business time.It seeps over and contaminates other aspects of your lives.When a family partnership goes bad it doesn't end there.It lingers on for years or even decades with hurt feelings.

If the partnership is 50/50 who will make the decisions??It sounds like both you and your sister want control and would be a recipe for disaster.Why don't you just have a passive investor that brings the cash to the table??

When you form this partnership with family you will bring in all the legacy junk built up over the years.

I had a restaurant with family and it was very hard.I sold it off after a few years.The drama was killing me.

It's better to give a person you hire (not family) a certain amount of tasks and they are paid to do a job.I don't have any family involved in my business by choice.I have learned from experience it is better that way.With a partnership especially family both might pull their weight at first but eventually someone will get lazy and one will have resentment against the other.

I am not saying a family partnership can't work but in most cases it does not and the odds are against you.

Good Luck

Bryan Hancock · Answer

I could definitely see there being some issues with a conflict of interest.  This is fairly common in real estate where people have entities and wish to engage in certain projects with varying sets of partners.  What generally works well is to set up joint ventures for specific projects where parties all desire to be equity participants.  This limits the scope of the engagement and increases the ongoing paperwork.

If you intend to do business with both parties this may be a half solution...although it doesn't seem to address some of the underlying problems.  There is really no sense in setting up a full blown business with someone else unless you intend to continue with the business as a going concern and your goals and needs are compatible.  If a later engagement with your wife will cannibalize business with your sister I can see why it is a problem for her.

Bruce M. · Answer

Bryan, I totally agree.  She states that she thinks that I'll bypass company A to do all deals with company B since all the money would then come to my houshold.  I'm not that careless.

Bryan Hancock · Answer

Why does she care?

Multiple companies a conflict of interest?

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