Should I start up an LLC if I am going into business with someone

Question

So I recently passed my real estate license and will be partnering up with a friend of mine who is a contractor and has had a successful flipping business. I have listened to Brandon Turner's advice on LLC's and he makes it seem like when you are just starting out they are not necessary, but he also was referring to a single investor. Does it only make sense for us to have an LLC with both our names on it? Biggest thing for us is when we get to the offering table I don't like the idea of "hey who's name will we put this in" I want us both to have equal stake/risk. Also, I am in Saint Louis, MO if that matters at all.

*note he already has an LLC set up and its through Nevada which he created when he went through the Fortune Builders course, should I just join that if its cheaper?

Jake Hottenrott · Answer

@Justin Schoemehl - Congrats on passing the real estate licensing test.I'd fall into the camp with everyone who says to start an LLC and more importantly, make sure that you have an operating agreement in place. While the LLC could definitely be something that you put off, it will give you a business structure for the future. Missouri LLC's are cheap to set up, just make sure that you work with an attorney and a CPA so that when it comes time for taxes or any liabilities you have yourself covered.Best of luck!

Basit Siddiqi · Answer

@Justin SchoemehlIn my opinion, people get into partnership agreements more often than it is necessary, especially with friends/family members. A ruined deal can ruin a friendship. Also, just because he is a great friend doesn't translate into a great working relationship.Have you considered just hiring him for his work?You win because you will get a piece of real estate all fixed up after you friend works on it.Your friend wins because he is compensated for the work he did.If you do decide to go the partnership route, spend an hour or two with an attorney and have everything in writing.What is each partner's ownership percentage?What happens when the property is sold?When will the partnership dissolve?

Michael Plaks · Answer

And this thinking is the source of many problems ahead. This is business, not an ego contest. Putting your names on paper does not create equal stake/risk. The only one who is risking something is the one who actually brings the money to the table. Sounds to me like this is you, and your buddy is bringing his vast construction expertise that he harvested from attending the FB training. If this is the case - then your name, and your name only, goes on everything. He is a contractor you will hire for your project. LLC is optional, depending on what your attorney advises you.If, on other hand, you both are contributing money and sharing all costs - then you should create an elaborate operating agreement (if forming an LLC) or a JV agreement. Both are partnerships for tax purposes.

Dan Mumm · Answer

I'm not a fan of partnerships and drafting lengthy operating agreements very early on when you are BRAND NEW and have no idea what to expect and what the norm will be... I'd start with that question. Why exactly are you partnering with this person? Why did he "used to" have a flipping business? :)If you're brand new, your #1 priority should be finding deals.If you need this guy for his contracting work or experience, bring him in when you have a deal and draft a simple agreement for that one deal. Do that over, and over, and over, and over again until you both prove to each other that you even want to stay in the business, let alone keep working together. Don't put the cart before the horse, in my opinion.

David Flores · Answer

@Justin SchoemehlAn LLC is completely optional but an operating agreement is a must when partnering with someone. An LLC will protect you from your personal life/finances. The operating agreement will ensure the agreements you make with your partner are upheld.

Justin Schoemehl · Answer

Thank you, everyone, for contributing your knowledge and insight. I really do appreciate it.

Dennis M. · Answer

I would be taking ownership in land trusts with your partners llc as trustee and your llc as a beneficiary but that’s just my opinion

Natalie Kolodij · Answer

If you think you are going to continue working with this person on an ongoing basis it could make sense. When you add two people to an LLC then it creates a partnership with the IRS and you will need to file a form 1065 annually as well, in addition to your personal 1040 returns.

Peter MacKercher · Answer

Yes you should have an LLC and more important operating agreement if you going to partner with someone. An operating agreement is 6 pages on how is formed and 14 pages give or take on how you break up which is most important. To file in MO it's under $60 on line and take less than 5 min. I would do one then evaluate if it works do another but by no means should you say we're going to work together forever, and if your best friends i would suggest not doing it.