How to structure partnership/JV with two possible investors

Question

Here is the deal:My neighbor and I formed a partnership (LLC) a few months ago to buy, rehab and flip houses. We have $40K in the business account but in the South Florida market does not make us very competitive for cash deals. My partner has been a buy/hold investor for a while and we work well together, although we haven't acquire our first flip as yet. We currently have two possible investors that can add $60K (combined) more to the pool, however we don't really want to make them members of the LLC. They have no experience and at most minimal knowledge of REI or RE market. Their intention is to partner with us as members of the LLC. We will be meeting with both of them on Saturday to iron out how we can work together. We want to go to the table with a proposal already in hand.How can we structure it so that they share in the profits of the flip but are not members of the LLC? In initial conversations they are not too keen on the idea of just loaning the money for a percentage return, but its not out of the question. We want to have operating control (decision making, hiring contractors, etc) through the LLC (basically having silent partners). Any and all advice would be greatly appreciated.

John Kent · Answer

Although, it is always easier to title the property in trust and split beneficiaries between the the LLC and the other investors. Then you don't have to worry about the situation where a partner wants to be bought out of the LLC.

Peter Philando · Answer

@John Kent I was researching the pros and cons of holding RE via a trust and I like what I see. I think this can work well for the situation I'm looking at. The reason why I'm shying away from adding more members to the LLC is because I don't want to be locked into any long-term partnership at the moment except for my current partner. Using the trust you are locked in on a deal to deal basis and anyone call pull out after a deal is complete.@Joel Owens I understand what you saying and we are planning on using a lawyer to finalize everything. We wanted a general structure to present and use a lawyer for the details.@John Thedford We're trying to iron out a way in which we can work with someone right now. We will present the offer to the potential investors and they can accept or reject. If its not a loan then all monies are at risk which will be explained by us and the lawyer. Thank you guys for your comments. I really appreciate any advice or suggestion that anyone has.

John Thedford · Answer

Generally speaking, I would recommend against it. Find private or HML. The fewer people you have to answer to the better. As Joel said, if things go wrong, everyone wants to blame the other guy. If you do take in new investors, everyone needs to understand the strengths and weaknesses of each investor and what they bring to the table. I would look for a proven track record before I gave money to a third party. Also, as Joel suggested, an attorney is a MUST in a situation like this. They will draft an agreement to protect each investor.

Joel Owens · Answer

All I will say is EVERYONE is excited about the possibilities of pooling money and turning it into something greater when first putting it together.Those dreams then quickly can turn into nightmares when the rubber meets the road. No thoughts of " sugar plums & fairies " anymore. Lot's of mold, foundation cracks, bad plumbing electrical, and money going out the door everyday until you sell it and hopefully make a profit.You need the attorney to outline risks and what goes wrong. What if the project doesn't make money and you all lose your shirt??Number one mistake and I see it over and over is people form an entity on the cheap because they do not want to pay an attorney. Deal goes bad and everyone points the finger at the other as being at fault.

John Kent · Answer

The Operating Agreement dictates how membership is handled otherwise you have the default where every member is a managing member. Which would require having an attorney update an existing operating agreement if you were changing the management structure of the LLC. Using a trust is very simple when buying cash. Buy the property titled to a trust. Select a trustee that can manage the property. Make all who contribute funds to the purchase x% beneficiary of the trust.

Peter Philando · Answer

@John KentFL LLC law does not distinguish between members (no managing members) unless there is documents to the contrary .. like an operating agreement. However, we don't really want to add anyone to the LLC. I like the Trust idea but could you expand on that a bit.Thanks in advance

John Kent · Answer

Managing Members manage the company.Limited Members share in profits but don't manage the company. Have your attorney adjust the operating agreement to suit.