Structuring a partnership

[Jacob Pereira]

Hi BP,

I've always been a buy-and-hold investor and have never had partnerships before, but recently a colleague of mine presented me with a partnership offer on a flip he's considering that seems worth going for. I'd like to get some advice from here on how to structure our partnership to be legal and as tax-advantaged as possible. Some details:

All costs and labor will be split 50-50

He will take out the loan, then he will quitclaim it into an LLC which we will both own evenly

Upon sale of the property we will liquidate the LLC and split all profits evenly

Is it that simple? What are some things I'm missing? Any additional advice before I go on this endeavour? 

Thanks for your help.

[David Miller]

1. Transfer of property from your partner individually to the LLC will almost certainly trigger the due on sale clause for the mortgage and could result in an acceleration of the outstanding balance owed. A lot of people take that risk - just understand it is a risk.

2. If your partner transfers the property into the LLC of which you have a 50% interest, what is the consideration for your 50% interest? Your partner needs to make sure it is not a gift to you.

3. What happens if one of you die? Becomes disabled? If you and your partner reach an impasse? What if one of you is married and get divorced - what interest or potential claim could the spouse have in the LLC? Make sure these issues are addressed in the LLC's operating agreement.

4. What financial information, if any, do you need to disclose to another? What information, if any, is confidential?