Investing with multiple partners under an LLC

[Anmmar Alsaggaf]

Case: 

So what I have 4 partners with 25K for a total of 125K on a single family home we are looking at that rents for $1500. How do we structure a contract or deal so that all revenue/profits/expenses/taxes are split evenly. Also if someone wants to buy out can I just set it at the buy in price. So if you bought your share for 25K and decide to sell in 1 year or 5 you can only sell at the 25K initially invested (to entice the members to stay in longer). These are people I trust but we still want to lay out all the rules. 

[David Fitch]

Short answer: hire a small business attorney to structure the partnership and operating agreement for you so he/she can ask you and your partners all of the right questions, and then build an agreement that reflects what you all agree on. There is a TON of stuff to consider. 

I went through this myself, and I have the benefit of having a lot of attorney friends - a few specifically that work in-house at REITs, so structuring LLCs for purposes of acquisition is basically all they do. 

Here are just a few examples: 

• What happens if one of your partners dies? Are you stuck with a new partner that is whoever the last guy designated to inherit all of his stuff? If not that, how do you value his part of the LLC at that point in time and pay his estate? Will you have the funds to do that? Will you have to take out an equity loan against the house? Will there be enough equity to do that? If not, where will the money come from? Will your operating agreement allow for an equity loan?
• What are the rules around making binding decisions for the company? Will it be that any one of you can do anything, for convenience sake? Or do you need 100% consensus to do every little thing to protect yourselves? Or something in the middle? If so, what is that "middle"? You have to spell it out. 
• What state will you register in, and why? There are pros / cons to registering in either the state that you live, or the state that the property exists, or a state like Delaware that is known to have one of the most well functioning court systems for commercial litigation. 
• Are you sure everyone is ok with an even split? What happens when someone ends up doing more of the work? Have you defined who is doing what? What if one of your partners gets angry over time because a lot of the work falls on him, and sues your company to get more than an even split? There are a thousand ways that could happen, especially if you're vague about who does what - one of your partners could challenge the operating agreement if it's done poorly, and a court might agree.
• What address will you use as the primary location of your business? This gets more complex if you and your friends live in different states because if you choose one of your homes, now one of you has to deal with all of the mail, filing of documents, responding to requests, random other things that have to do with being the registered business address of a company. That adds work to someone's plate - an example of what could go wrong with the even split in the last bullet if you haven't considered all of the "who's doing what" scenarios.
• Are you aware of the things you need to do to protect the "limited liability" part of the structure? Are your partners? Are you all willing to do those things? If not, a court could toss out your liability protection rendering the structure useless, and your personal assets become available. 
• There are a LOT more. Hire a lawyer.