How should I create a contract for my partnership?

Question

My business partner and I are interested in buying a property together to househack for a year or two before moving out and renting the place out entirely. So far we have been preapproved for a loan and are working with a great agent. I have a solid foundation of RE knowledge however, I know nothing about how to go about forming a contractual agreement between us. I was wondering...

1. How exactly would we form a contract? Would a lawyer need to be involved?

2. What would need to be included? I know generally that we need to state that we would assume equal ownership and evenly split the cashflow from the property but I would like to know more specifically what should be included.

3. Would forming an LLC be necessary at all for our situation? This might be the topic of a completely different post but I thought I would throw it in.

Many many thanks!

Craig Sloan · Answer

@Ethan McRae you ask some good questions.  You should definitely get a lawyer involved.  It will cost you a little but it could save you a ton of headaches and money down the road.  Most people go into a partnership very optimistically but many partnerships do not end well.  An attorney can help you think through such things as:

• The percentage of ownership of each partner
• How profits and losses will be allocated
• A decision making process – As I mentioned earlier, this is especially critical because each partner is able to bind the partnership in a contract making each partner personally responsible for that obligation.

• What happens in the event of a partner’s death
• How disputes will be resolved – This is another critical piece.  People often enter into a Partnership with a friend or family member and they don’t consider the implications of future disputes.  Creating a framework for resolving disputes ahead of time can make the Partnership run much more smoothly.
• Dissolution of the partnership – This is another common issue.  People start a Partnership with great hopes and expectations and they don’t take the time to consider how the Partnership will be dissolved. *  Taking the time to think through these issues prior to forming your Partnership is time well spent.

An attorney and tax professional could also help you answer the LLC question.  My quick answer would be yes, you should form one.  In most states it is a pretty simple process.

Ethan McRae · Answer

@Craig Sloan Thanks for this, I think you bring up some good points. I am particularly interested in a decision making process/system and way specific way to go about resolving disputes. Problems will come up. Its not a matter of if its really just when and what will they be. That being said I really want to focus on figuring out how to systematically resolve conflicts in a way that doesnt put too much strain on our business relationship and helps us keep moving in the right direction. Thanks