Starting a Partnership

[James Scott]

Quick recap of my current/first deal:

I am buying a duplex with my contractor/family friend. He brought the deal to me on this occasion, before this he was just inspecting and giving quotes on properties I was analyzing. The deal will cash flow well and force equity right away. We agreed to put in 50/50 of the money needed to get the deal done and I put the property under contract and used a conventional loan as financing. He is fronting the costs of the labor and supplies, and pitching in on 5% of the down payment and closing costs, with what we have estimated the rehab to cost.

He suggested forming an LLC together, which I am not in favor of. I don't want to have a business partner just yet, but I do want to partner with him on this deal so far. I suggested the idea of being a general partner and limited partner in the deal, him being the limited and myself being the general. This way I still have control of the property and deal, while he is guaranteed his income, as well as not having to be liable for the property, as the general partner will be. He agrees with the idea.

I’ve heard about this style of partnership on the podcast, in much more sophisticated deals like syndications. I would assume it is possible to do this on a small deal as well.

If anyone has good sources on how to set up this type of agreement or advice/experience, I would greatly appreciate it.

Thank you all in advance,

James

[Costin I.]

@James Scott Before you can start to set up the legal framework, there are various issues that need to be addressed. These can be summarized as follows:

What are the objectives of the joint venture?

- general trading principles

- what will the business actually be doing

Who puts what in?

- cash

- other assets

- services

- are any existing contracts of either to be taken over by the joint venture

- who actually does / will do what

Will any external funding be needed?

- who will it be raised from

- who will borrow it

- who will guarantee it

Who gets what out?

- sharing of revenue profits or losses

- sharing of capital gains or losses

- is any payment to be made to either other than as share of profits, eg for ongoing services

- will the participants be operating a ‘salary/dividend split’ – ie taking their month by month requirements by way of low salary, balance as dividends?

What, otherwise, will be the policy in relation to dividends – to what extent is it intended to distribute / retain surplus profits?

Who controls what?

- responsibilities for day to day running, in all relevant areas of activity

 - tactical decision making (day to day)

- strategic decision making (longer term policies)

- what things can only happen if both parties agree

- what will happen if you can't reach agreement on some major issue - ie deadlock

What happens if either party 'wants out'?

- on what kind of notice will this be permitted

- does the other have 'first refusal' to take over the whole venture? - if so, on any favourable terms?

To what extent will the parties be free to carry on other businesses

- while the joint venture subsists

- if one party pulls out

Is it intended that spouses/partners should also be shareholders, to allow for tax advantages from a broader split of dividends?

Is there a vision that any others will become shareholders (or be granted grant options to acquire shares) in the company in the future?

- Who?

- Staff?

- Others?

- On what terms?

Participation in dividends?

Voting rights?

Are there any offshore angles:

- Is there potential for overseas sales or operations?

- Does anyone involved in the venture have any overseas connections?

= Does anyone involved in the venture have any plans to live overseas in the future?

Is there yet any written:

- business plan?

- marketing plan?

- cashflow projection?

Is there an ‘exit strategy’? If so, what is it – which of the following most closely hits the mark?

- ‘lifestyle’ business – ie simply intended to be run by and to provide an ongoing source of work and income for the proprietors, no clear vision for the long term future?

- possibility of future sale at some point?

A core object of the venture is to create an asset with a view to sale or flotation in 5 years?

Which aspects of the above do you feel most important at present? Which aspects concern you most? (NB each of you may have a different view here, the question is asked to understand where each of you is coming from) 

You might also want to read:

• How to Effectively Conduct Joint Venture Agreements as a Real Estate Investor
• how-do-i-properly-construct-a-purchase-with-a-partnership
• create-an-llc-for-first-partnership-best-way-to-do-so
• taking-on-partner-s-and-limiting-our-liabilites
• questions-for-capital-partners/
• real-estate-partnership-questions/
• questions-ask-investment-partners/