Best and easiest way to go into a 50/50 partnership out of state

[Justin Shie]

Hello,

My business partner and I live in California, but are looking to invest in a duplex out-of-state, specifically Missouri. What would be the best and easiest way to have this partnership? Do we need an LLC or can we just go in as co-owners? This will be our first property!

Thanks,

-Justin

[Katie L.]

@Justin Shie

That answer depends on a lot of things.  If you just go in as co-owners, you will likely be treated as a joint venture, which is treated as a general partnership.  General partnerships have unlimited liability so you will probably not have protection from creditors or tenants if you go that route.  However, you also save yourself $800 a year since GPs in CA are not subject to the $800 minimum.

If you are "doing business" in California, any limited liability entity such as an LLC or LP will be subject to a minimum of $800 a year to California. Doing business is broader than where the property is located or if you hire a property manager, so if you are making managerial decisions from California, chances are you are doing business in California. This means that if you create an out of state (like Missouri) LLC or entity, you will have to register it as a "foreign" entity in California and pay CA entity taxes. The same would likely be true if you formed a CA-LLC and then did business in Missouri as a foreign entity there.

If you are going to go the joint venture route, you may want to think about a co-ownership agreement.  What decisions require unanimous approval and which can one person give approval for?  What if one person wants to sell and the other doesn't?  Etc.  Having a formal operating agreement or just written general understanding goes a long way.

*This post does not create an attorney-client or CPA-client relationship.  The information contained in this post is not to be relied upon.  Readers are advised to seek professional advice.