To or Not to Form an LLC?

Question

A family member of mine (@Levi Blaylock) and I are wanting to partner on some future deals - Mainly buy & hold rentals. There are varying opinions in the real estate community surrounding the different ways to form a legitimate partnership.

Any feedback or recommendations on LLC's vs. other options? Thanks!

Scott Smith · Answer

Hey Eli,

Establishing an LLC for a partnership is a good idea for several reasons, but also comes with more costs. The reason you would want an LLC is that you would be able to define the level of investment each party is committing to prior to partnering, explaining the responsibilities of each party involved, what should happen if there is a breach of contract, how funds are handled and more. The big benefit is that you are compartmentalizing the liability of the investment from your own names, so if there are legal issues it shouldn't spill over into personal assets, etc. You can check out this article for more information. Just make sure you have an experienced attorney to write up the operating agreement to make sure that you cover all your bases!

This is not the only option out there, but the one I tend to favor. Keep exploring BP and asking around, finding the ways other investors is a great way to learn.

This isn't legal advice, just my opinion as a real estate investor.

Eli King · Answer

Hi Steve - Thank you for the insight.

To answer your question, the initial interest to partner together came from the joint interest to purchase the same piece of property. After discussing the option to go in on that property together, we began discussing the potential for others as well - I am simply looking for opinions on the best ways to partner with the same individual on a small scale.

Steve Vaughan · Answer

Because financing/debt is involved you may want to explore owning as TIC and having a JV agreement at least to start out. Test the water before forming a perpetual entity.

Bigger question though is why have a partnership?  Just to share the capital outflow/down payment? Marginal reason. Or do you have complementary abilities and purposes?  Much better reason.

Eli King · Answer

Current goals consist of purchasing 1-2 buy and hold rentals each year for the next 3-5 years. Each property will require financing. At this time, we do not have plans to initially bring on a 3rd party investor, but this option is certainly on the table for future deals.

By saying, "legitimate partnership", I am simply looking for the best course of action to grow and protect our relationship rather than a simple gentlemen's agreement. I have yet to purchase any time of property partnering with another individual.

Patrick M Nichols · Answer

Can explain more about your strategy, goals, and concerns? Will you be getting financing on these properties? Will you have 3rd party investors? There is no one blanket recommendation.

Also, what is a "legitimate partnership"? I am not trying to be flippant. I am just really not sure what you mean by that. What kind of partnership is illegitimate?

To or Not to Form an LLC?

Most Popular Reply