You have found a perfect property but you realize you need a partner to close a deal. Choosing to have a partner can be for a variety of reasons. It helps to shoulder some start-up costs, helps to offset the risk of the investment, you may not need to put as much money upfront, and a partner may have additional knowledge. Real estate deals big and small can involve partners. People become partners on small deals when first investing but people also gather partners for large deals as it disperses the risk. Having a partner is a great way to invest in real estate; however, certain precautions may be needed in order to ensure a smooth business arrangement.
There are countless stories of partners going into business together who eventually have a falling out. Partners who were once good friends, family, or business associates become hated enemies. Going into a real estate, if you have the proper documentation and have all agreements and understandings in writing to clarify what each partner to the deal intended.
A general partnership is the least formal method to invest in real estate with others. It does not need to be specially registered with California or the IRS. In fact, any business arrangement that you have with another person would be considered a general partnership if you do not have anything in writing. There are a number of reasons why a general partnership is the least favored method to own real estate together with someone else. First, a partner becomes personally jointly and severally liable for all liabilities involving the business venture. For example, if a person suffers an injury on a property you own with a partner, the injured person could collect on a judgment from your personal assets if the property is held in a general partnership. If you intend to have a continuing business relationship and hold the real estate, you should not consider a general partnership as a form to own real estate.
If you own property as tenants in common or joint tenants with someone else, it would be considered a general partnership and treated as a general partnership if there was a dispute.
Limited Liability Company
Most professional real estate investors prefer to hold real estate in a Limited Liability Company (“LLC”) because it offers the ease of management under a general partnership with the limited liability of a corporation. The LLC provides protection against personal liability as long as corporate formalities are held. An LLC is also advantageous because it is not taxed like a corporation but is taxed similar to a general partnership thus not requiring double taxation.
In order to form a LLC, you must file an Articles of Incorporation with the California Secretary of State and then draft an Operating Agreement which is the legal document that governs the operation of the LLC. Having an attorney draft the Operating Agreement for your LLC will help to ensure that it is legally enforceable and puts in writing what the parties intend.
If you have questions involving the purchase of real estate or the forming of a business venture to purchase real estate, please contact Anthony at (818) 839-5220 for an initial consultation.