First Post! Creating an LLC with brother?

Question

My brother and I are looking to buy our first deal. We want to partner on this first one and on some but not all future deals. To give a background he is 22 and about to be earning stable income in the Navy by the end of this year and I am 20 years old playing baseball in college not currently earning income. We want to invest in some deals together and share in equity and profits on those but also have the ability to do deals without one another and not intermingle those future individual investments.  Would it be better to create separate entities and partner on specific properties or create one multimember LLC? Is there something specific in an operating agreement that would take

David M. · Answer

Account Closed

Yes, when you are investing with a non-spousal partner you should have a legal entity like a LLC.  You still don't really get additional deduction benefits, but the allocation of profit/losses is where its required.  Also, the various legal provisions regarding how decisions are made and all the various what-ifs (e.g. somebody wants out, somebody passes away, etc.)

As how to structure..  it depends on how you THINK you might invest --- and then potentially adjust from there.

If you each make your own LLC, then these single member LLC's are the Members on a multi-member LLC that takes Title, its the more flexible.  For the cost of a bank account / bank cheques and the filing costs for a LLC, you get plenty of flexibility.  Your single member LLC's will be retained and you could do things like work on your branding..  Also, as you do more deals, you could add/remove other investors as your form new LLC's to do the deal.  This lets you customize each deal, not necessary saying you can't put more than one deal/property into the multimember LLC mind you.  This can more advantageous when there is slightly larger group and for example, lets say one of them doesn't want to or is unable to partner on a deal that comes up.

If you two just go directly for a multi-member LLC, it doesn't mean you are "inflexible" by comparison.  Depending on your strategy, you could still keep making more multi-member LLC's for new deals or just keep using the same one if all your business terms are the same.  Even if they arent', you would just amend your Operating Agreement.

This all being said, remember that LLC's do incur various direct and indirect costs.  Each LLC is its own entity and will require its own bank account and it would need its own set of books (not necessarily each deal will need its own set).  Also, some CPA's charge by the LLC.  Single member LLC's default to being disregarded (at the federal level anyway) so its not really a separate return, just another SchE (or maybe SchC depending on wha tyou are doing).  A multi-member LLC will be a partnership so a 1065 partnership will be required.

Hope that helps.  Good luck.

Joe Martella · Answer

My brother and I have similar situation. We have our own investments and when we were planning on doing an investment together, we were going to create an LLC that each of us owned. It costs money to open an LLC - each state is different, so why go through the additional expense. If it was me, I would open a joint LLC there may be better tax benefits since you won't be considered a disregarded entity and when you are both interested in getting your own LLC then open it. Engage an accountant. Take a look at this thread. Maybe you can get some tax answers here: Ask me (a CPA) anything about taxes relating to real estate | page 75 (biggerpockets.com)

That is my opinion. I think that it is awesome that you and your brother are getting in on investing at an early age. Kudos to you both and thank your brother for his service to our great country!

Account Closed · Answer

Thank you both for your insights, if it's like anything else I'm sure there are pros and cons to both options. It probably would make more sense cost wise in these early stages to open a joint LLC and crossing the solo deal bridge when we come to it.

Account Closed · Answer

It's cool the two of you want to work together.

My recommendation is that each of you have an LLC that collaborates on projects. It is much easier on sorting things out when you need to. You can do Joint Ventures or do the "one off" on your own and it doesn't require the paperwork and procedures required if you are both in one LLC.

First Post! Creating an LLC with brother?

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