???'s Forming an Investment Group

[Nick DAgostini]

Hey there. New to this so please forgive any ignorance. Some investor friends and I want to pool our resources together to purchase a smaller unfinished residential development (7 Parcels), build the homes, and sell them. We've ran the numbers and the math is sound. I've owned rental real estate with partners in the past but nothing this size and this many partners. What would be the best plan of attack to protect everyone's interest? Would an LLC or an S-Corp be the better option? Everyone is contributing different amounts, and in addition to my personal monetary contribution to the project, I am also the one doing all the leg work; finding the property, lawyers, construction managing, selling the end product, etc. What extra percentage of ownership is customary for this kind of work, if any? Any info would be greatly appreciated. Thanks

[Account Closed]

Your set-up will depend on

1.) how many people are involved,

2.) how much they are contributing, and

3.) the extent of their active involvement.

If there are more than three people involved, you will reach a point where someone does not agree with the others, and can legally stop everything, unless you set it up right.

It seems like you said that you will be the driving force, and the others will just contribute capital of varying amounts.

If that is the situation, then here's what you can do.

You set up a Limited Liability Partnership, with a number of Limited Partners and one General Partner.

You and each of your friends will be the Limited Partners, with ownership of 90% of the LLP, and the percentages reflecting the pro-rata amount of your contributions.

Then you will form a corporation and the corporation will be the General Partner. The General Partner will own 10% of the LLP, receiving this in return for running the whole project.

The GP will make all of the decisions.  The Limited Partners will be prohibited from taking part in the project at all, or they lose their protection as being Limited Partners.

The protection to the Limited Partners is that they are not liable for anything concerning the LLP except to the limit of the amount of their personal contribution.

The General Partner bears all of the liability.

The LLP is a great vehicle for people who want to limit their risk but still invest in development real estate projects, and for a Developer who wants to use other people's money but still make all of the decisions and move quickly.

If you do the corporation correctly, you can effectively limit your own liability as well.

I hope this helps.

Good Luck.

Michael Lantrip