Best entities to form for Texas Partnerships?

Question

Hello everyone! My name is Daniel and this is my first post to BP. Just became a Pro member but have been through probably about 200 podcasts in the last year.

I am looking to partner with a friend for future BRRR's and flips but just wondering the best way to go about a 50-50 partnership? I'm assuming just a Joint LLC?

I know you can't technically give legal advise but I've heard many podcasts where the guests partner with others and curious how they're splitting the owning entity and taxes?

Thanks in advance!

Jerel Ehlert · Answer

Attorney says: It depends.

Seriously though, it really does.  Assuming Texas participants (you and your "partner") and a Texas property:

An LLC tends to be the simplest and easiest when it comes to care and feeding.  Still decent for 2 people on mildly complex deals.  But the more complex, the more sophisticated each member should be.

GP/LP when there will be active and passive participation.  Even so, the GP should probably also be an LLC.  More common when raising money.

GP, either incorporated or unincorporated are generally frowned upon.  Fiduciary duty will almost certainly bite one or both of you.

JV is a GP with an agreement to split debt (in simplest terms).  Still not a good idea, but sometimes workable where the JV participants are also entities, and the transaction is short lived then everyone walks away...and sophisticated.  Most lawyers outside real estate disagree.  Common enough in O/G development between drillers/operators/field services/refineries.

And you should familiarize yourself with the Texas Business Organizations Code.  Focus on the statutes related to the entity you choose.

What are *not* entities?  Trusts of any shade.  S-corp and C-corps (those are tax structures under federal law, not state law).

David Gotsill · Answer

@Daniel Huffman -

Congrats on that first post.  Despite not knowing about your specific situation and not being versed on Texas law, I can perhaps share a few thoughts.

From 10,000 feet, you and your partner will either each directly own a portion of the property, or you will own a portion of an entity, which in turn owns the property.

The former would typically be accomplished through a tenancy-in-common (assuming that's available in the jurisdiction in which the property is located).  As tenants-in-common, you would each directly own an undivided 50% interest in the property.  (Not a tax specialist, but it's my understanding that...) You'd be taxed on your 50% interest just as if you owned the property yourself.

For the latter, common entities would be a general partnership or an LLC.  Most investors prefer LLCs because LLCs can shield the members from liability, which is not the case in a general partnership.  Happy to elaborate on this point if it'd be helpful.  (Again, not a tax specialist, but...) I believe with an LLC you have tax options, and can elect to be treated as a partnership for tax purposes (in which case you're taxed on your 50% interest, same as above), or elect to be taxed at the LLC level.  In most cases, I believe that 50-50 partners elect to be treated as a partnership for tax purposes, but there may be nuances with which I am not familiar.

If you guys are planning to finance the purchase or look for a cash-out refi (presumably the case if you're BRRRR-ing), then you might want to check with a lender or two, for general restrictions as to how a property must be held.  For example, in a recent transaction I did with a few partners, the lender required that the property be held by a single member Delaware LLC.  So, we had to have LLC 1 as the property owner, with a single member, which was LLC 2.  Then the partners and I were members of LLC 2.  Because we were discussing with the lender from the early stages, we set it up as we went along, and didn't have to re-do or re-structure anything.

Ronald Rohde · Answer

As Jerel describes, LLCs are the most common as they fit the job for a very large percentage of partnership deals. Make a list of the parameters as it will help you when you talk to an attorney.

Daniel Huffman · Answer

@David Gotsill Will do! Thanks again for your time and input!

David Gotsill · Answer

@Daniel Huffman -

Yes, I think that getting the right team would help you answer these questions.  I'd encourage you first to be active on these forums, and in short order I think that you'd have a clearer idea of what you want to do and when speaking to an attorney or CPA would be useful.

You and I aren't the first to partner with others for a deal, and certainly there is an abundance of information related to partnering up here on the forums.  It can be challenging to sift through it, but in the end you'll be better prepared to move forward than if you had begun by speaking to professionals.  When you do decide to speak to those professionals, I would suggest you approach CPA/Attorney with the idea that they can first help you drill down to the right questions, and then once YOU decide, they can help structure.

In short, it's no secret that I'm a huge proponent of these forums, so best advice is to stay active here.

Daniel Huffman · Answer

Hey @David Gotsill Thanks so much for your input! Definitely very interesting and alot to check in to. We are at the very early stages right now as well so setting up as we go would be perfect but just want to get as much information as I can before we start talking to the local professionals.

I'm assuming all my questions can be answered with a CPA and attorney?

Best entities to form for Texas Partnerships?

Most Popular Reply