Partnership structuring (Best way to go about it)

[Account Closed]

Hey bigger pockets!

Just wanted to get your advice . My friend and I are both real estate rookies, living in Las Vegas (Both only have one property under our belt) and are interested in partnering on a multi-family deal.  

That being said, what's the best way to structuring a partnership so that we have equal ownership in the property?

Would we apply for a mortgage as cosigners? How would we ensure both of us would be on the title? 

[Art Ritter]

Hi Maciej Charyga!

Looks like you are really describing a joint venture for your next RE investment adventure - and I would suggest that you choose an entity structure that is jointly owned by your personal business entities (i.e., your LLCs, or whatever your formal personal business entities are - please take your personal business entities beyond sole proprietorships!).  

Disclosure: I am neither a lawyer nor an accountant - nor do I play either of these roles on TV.  Offered here is strictly business model and management advice.  Please choose and use a competent lawyer and tax accountant who are local, are RE investors in their own right, and who will 'play well together' (trade-offs between the 'best solutions' from these sometimes-competing viewpoints will have to be carefully resolved to your best interest) to advise you together on the particulars of business entity creation for you and ensure that they create for you what YOU want and what will achieve YOUR business purposes.  After all its your business - not theirs!

As a general warning, partnerships are fraught with danger as, for example, each partner (unless very carefully restricted in the partnership agreement) can encumber the partnership (and thus, the other partner) even without the other partner's knowledge!  Beyond that, partnerships - even limited partnerships - do not offer much personal privacy to the partners - or asset or personal liability protection or tax advantage over other entity types for RE investing uses.

So choose an entity type that prevents such misunderstandings, protects each of you from the other, protects the assets of the joint venture from tax and legal liability, removes you both personally from legal and tax liabilities of the venture, minimizes the business risk of the joint venture and each of you, and maximizes the tax advantages for both of you (through your personal business entities).

The basic (appropriate) entity types for this are the: 

- Limited Liability Company (generally very good for holding an asset and providing it with legal and tax liability protection if done right) and the

- Corporation (generally very good at operating a business and limiting their owners' personal liability to their investment in the corporation - to the limit of the value of the assets held by the corporation, though for this reason are not as good at holding assets and protecting them from risk / liability judgments as are LLCs).

So the joint venture could be a corporation formed where you live and owned by your personal business entities for operating the venture with the  assets of the venture held in LLCs formed where the property they own is): 

- one (formed where the corporation is) to hold assets used by the corporation for the venture's business purposes which are of very low risk of causing any liability on their own (bank accounts, mortgages, investments, etc.) and 

- several others to hold individually EACH individual 'toxic' asset, e.g., 

-- the real property itself (which by its existence creates all sorts of risk and liability for the damage it may cause like slip and fall accidents, fire, etc.), 

-- each major group or piece of any equipment used for maintenance or enjoyment of the real property's use (which can cause injury to its operator, others, or to property), 

-- each vehicle owned/used by the venture (which can cause similar damage), 

-- etc. ... You see where I am going with this - liability caused by the existence or use e toxic asset is strictly limited to the value of the entity that owns it - i.e., the specific LLC (if its operating entity, in this case, the corporation, is indemnified by the corp-LLC operating agreement to use the asset for the purposes of the business).

So, with the proper operating agreements and contracts, indemnity statements, and insurances between and among all of these entities in place, you and your business associate will have created a structure that will limit the risk for both of you and the venture's assets and minimize the tax exposure of the venture - maximizing its financial return to you through your personal business entities.

You can scale this business way up as you buy more RE (and place each property in its own LLC) while operating the whole with the venture's corporation.

Your corporation can easily fund new purchases commercially once you are in that RE range - collateralizing across all of the properties held - without having to personally guarantee any of the new commercial loans.

Additionally, you will have created a way to sell the RE assets of the venture (when it comes time to do that) without closing costs as its 'owner' never changes - only the owner of the LLC that holds it.

You are in for a great adventure!  Enjoy the ride!

Cheers - Art