Eau Claire, WI · Member since 2018 · 8 posts · 0 votes
A friend and I have been talking about investing together and have been bouncing around the idea of using an LLC. I currently live in Wisconsin and he works and lives in California. We would be investing in Wisconsin and surrounding states with mostly buy and hold rental properties. We are thinking 50/50 ownership.
Any thoughts on how to structure this? Use an LLC or something else? Any tax or financing concerns?
Investor · brentwood, CA · Member since 2016 · 1k+ posts · 730 votes
8y
You might have an $800 dollar California LLC filing fee to pay every year if you have a California partner even if the LLC is formed and operated outside of California.
Investor · Lee's Summit, MO · Member since 2017 · 81 posts · 37 votes
8y
I am not a law tech but I use and love the LLC. This partnership will only be as good as your relationship. To get a loan via LLC you will both have to put up your personal records and possibly pledge personal property beyond the LLC holdings ( fine print). LLCs have not helped me with taxes but the real estate has. The net profit or 50% for you of the net is still going to roll downhill to your 1040 as income.
Investor · brentwood, CA · Member since 2016 · 1k+ posts · 730 votes
8y
You might have an $800 dollar California LLC filing fee to pay every year if you have a California partner even if the LLC is formed and operated outside of California.
@Joseph Heimann - the best way to structure it is to have the properties as 100% owned by you (or by an LLC of which you're the only owner), and your friend will be either a lender to you if he is bringing money or a contractor to you if he is bringing labor.
50/50 LLCs are the second worst way to do business, only behind a handshake partnership. Why? Because it is a (business) marriage, with all the risks and problems.
You'll want to have a very good operating agreement and work out with your partner exactly who will have what rights and what is to happen in various situations. For example, can either one of you transfer your ownership interest? What if one of you gets married/is married - can the spouse have a share? (CA is a community property state too so be careful of that if the CA partner is married or contemplating it.) Who will have check writing authority? Do you need majority or unanimous approval for various circumstances? What happens in the event of a disagreement? Etc. on and on.
If your partner lives in California and he is making management decisions, it is very likely that the LLC will be "doing business" in California and therefore will subject you to $800 minimum tax and filing as a foreign LLC in California (unless you just form a CA LLC and then would need to file as foreign in the states where your property is located, which is certainly a valid option). If you want to avoid this, you will need to be very careful how you structure your agreement and what role the CA partner plays.
Also your CA partner should be aware that he/she might be subject to filing an income tax return in the state where the property is located since that income would be earned in that other state. As a California resident, CA will tax ALL his income, but then give him a credit for taxes paid to other states. It doesn't quite work out to be a wash because CA rates are often higher than the other state, but before you buy property out of state, something to be aware of if you are not already.
You'll definitely want to see an attorney for this - this isn't one of these try it on your own things. If you need a good accountant, let me know too. I know someone in Milwaukee if that's anywhere near you and know several in California and San Diego. Good luck!
*This post does not create an attorney-client nor a CPA-client relationship. It is not to be relied upon. Readers are advised to seek professional advice.
Eau Claire, WI · Member since 2018 · 8 posts · 0 votes
8y
This is great stuff, thank you for the info! We will have to discuss more what we want to get out of our arrangement. It may be that we can get by without an LLC for the first few small properties.
If you don't form an LLC, you will still want to have a written agreement between the two of you outlining what you have agreed to and the rights and powers of each person. If you don't form a limited liability entity of some kind, you will be deemed to have formed a general partnership. General partners have unlimited liability. Be sure to adequately protect yourself with insurance if you go that route. Good luck!
*This post does not create an attorney-client relationship. The information contained in this post is not to be relied upon. Readers should seek professional advice.