Partnership scenario…..any suggestions on setting this up?

[Anthony Bonanno]

I will be partnering with a friend on some rehab projects. My contribution equals approximately 85% of the “all in” costs through bank funds I’ve secured. His contribution will be the remaining 15% from his own personal funds. This business will be full time for me. I am licensed and will be locating properties, estimating rehab costs, negotiating deals, and doing some of the rehab work myself typically on a daily basis. This will be part-time for him. He may help with rehab work on the weekends.

I'm just getting started and could use his cash contribution to get the business off the ground. I've already set up my own LLC. I've estimated net profits of $15,000-$18,000 on each project. I'm thinking a 70/30 split would be fair. I'm concerned that he may be thinking 50/50. We're meeting this weekend. I definitely need his cash infusion to get started. Any thoughts on how you would set this up? Should he form his own LLC?

[J Scott]

He's contributing 15% of the money and less than 50% of the time/effort, and you think he'll expect 50% of the profits? That certainly seems unreasonable to me.

I generally like to think about it from this perspective -- the money/risk is worth about 50% and the time/effort is worth about 50% (not everyone agrees with this, btw, but this is my opinion).

So, of the money half of things, you're contributing 85% and he's contributing 15% -- so for that 50% of the input, you should get 85% of the output (or about 42.5%). And for the time/effort half of things, you'll be putting in (it sounds like) about double the time/effort than he will. In other words, for that half of the input, you should get 2/3 of the output (or about 33.3%).

So, in total, using my way of thinking, you'd be entitled to about 75% of the profits, and he'd be entitled to about 25% of the profits.

Now, let's consider it another way. If you're earning $15-18K in profit per project, I'm going to assume your all-in costs are going to be about $100K (that could be a bad assumption, but if you're earning 15-20% on your money per project, that's about right).

So, he'd be contributing about $15K per project. If a typical project lasts about 6 months (it may if you're just starting out), and using the formula above he were to get 25% of the profits, he'd be earning about $4K on his $15K investment in a 6-month time frame. Annualized, that's over 50% return.

You, on the other hand, would be earning about $12K on your $85K investment over 6 months, for an annualized return of just under 30%.

So, from this perspective, he's earning a better return on his money than you are *AND* he's putting in less work. So, even using this scenario, he's probably getting a better deal than you are.

Just some food for thought...