An LLC with a Partnership has become a popular new business model.
You have been told that using Partnerships in Real Estate Investing is a bad idea. I’ve said it myself.
That is not always true. It depends.
And you have been told that using an LLC provides the strongest possible protection against personal liability.
And, I’m afraid, that is also not true for everyone. There might be a better way.
If you do the Partnership right, using an LLC, you get the flexibility of the Partnership, plus the strong personal liability protection of the LLC.
I’ll show you how.
WHAT IS A PARTNERSHIP?
As I said, you have been told forever that using a Partnership in Real Estate Investing is a bad idea, and you should never do it.
But the bad idea is not the Partnership, the bad idea is doing business as an individual, and then getting together with another individual, and investing together in real estate.
When you do that, you are creating a legal entity, even if you don’t file any paperwork, and the legal entity is called a General Partnership.
That means that the Partnership is subject to certain laws.
Basically, a General Partnership has no limits on liability.
And each Partner in a Partnership is responsible for the debts and obligations of all of the Partners, and each Partner can incur debts and obligations on behalf of the entire Partnership, without the knowledge or consent of the other Partners.
And you want to avoid this situation.
But not using a Partnership means that you are giving up all of the flexibility offered by using a Partnership as a Business Entity.
With a General Partnership you can almost design your own business entity by using a Partnership Agreement, a contract between or among the Partners. It will cover such matters as:
- Initial Capital Contribution.
- Ownership Percentage.
- Profit and Loss Allocation.
- Division of tasks, responsibilities, and authority.
- Dispute resolution.
- Dissolution and distribution of assets.
But you still cannot disclaim liability.
So, let’s look at the details of how to get the flexibility without the downside, using an LLC with a Partnership.
WHAT IS AN LLC?
An LLC is a Limited Liability Company.
It is a legal business entity that you form in the State where you live, or sometimes in another State.
An LLC is owned and managed by its Member of Members.
If you are the only Member, you have formed a Single Member Limited Liability Company (SMLLC).
If the LLC has two or more Members, it is referred to as a Multi Member Limited Liability Company (MMLLC).
You, as an individual, own all of the Net Income of the LLC, and since you own the LLC, you own all of the assets that the LLC owns.
But you have no personal liability for the activities or the debt of the LLC.
And that is why you are told that an LLC offers the Real Estate Investor the maximum amount of protection against personal liability.
And that is true, but you can go further to enhance that protection.
I have a complete explanation of how to use the General Partnership form of business, along with LLCs, S Corps, C Corps, and Limited Partnerships, in my book entitled “Your Best Business Entity For Real Estate Investing” which is available here from Amazon.com or here on my website.
Now, let’s get to the good part and see how to use an LLC with a Partnership.
AN LLC WITH A PARTNERSHIP
Using an LLC with a Partnership requires you to use more than one LLC.
That is because you must have at least two Partners in order to have a Partnership.
(By the way, I capitalize some words that are not proper nouns, and that might startle you, and, yes, I know that under the Rules of Grammar, it is not “recommended,” but it is “permitted” for the sake of clarity, and I believe that it works for clarity. So bear with me.)
We will assume a situation where you are using two LLCs.
And, again, you can refer to “Your Best Business Entity For Real Estate Investing” for a great 50-page Chapter on everything you need to know about setting up and using an LLC in Real Estate Investing. And you don’t have to buy the book. Just go to MichaelLantrip.com where you will see all of my books, hover over and click on the cover, and you can read the entire Chapter starting on page 51. Enjoy.
Now, most of the time you might be working alone and using a SMLLC for your Real Estate Investing.
So do I. But there have been times when the situation required a different approach.
You might need to go in with someone else in order to be successful.
Either you are the “numbers guy” or the “money guy,” and you need to hook up with a Carpenter or Electrician or Plumber or Remodeler.
Or maybe the opposite, you can do the work but you don’t have the money, time, or knowledge to put the deal together.
A Partnership is what you need. But you know about the dangers of doing that as an individual.
In order to protect yourself, here’s what you do.
Each of you forms your own legal entity, probably an LLC.
Each of you decide if you want your LLC to be taxed as a Disregarded Entity or an S Corp, depending on what is best for your personal needs.
Then the two LLCs get together and form a General Partnership, with a written Partnership Agreement.
The Partnership Agreement will provide that each of you will be a Co-Manager, so you will make the decisions together, and share the liabilities, but you will be doing so as LLCs, not as individuals.
The Partnership Agreement can even provide for Unequal Allocation of the income and of the deductions.
And as part of the flexibility of the LLC with a Partnership, if your first project is successful, and you want to do a much larger one, requiring the addition of more investors, but you want to maintain total control, you can now do a Limited Partnership.
The new investors will be the Limited Partners, who will have no liability beyond the initial amount of their investment, but also with no voice in management.
In the Limited Partnership setup, your existing General Partnership, with the two LLCs as Partners, can be the General Partner of the Limited Partnership.
Although the General Partner of a Limited Partnership is the one with the liability, you will be shielded from personal liability because your LLC will be a Partner in the General Partnership.
And you still have all of the flexibility of a General Partnership, like unequal allocation of items between the Partners.
So, while it is true that you should not go naked into a Partnership for Real Estate Investing, there are many other ways to do the same thing, and often Partnerships are the very best way to do Real Estate Investing.
And if you do it right, as an LLC with a Partnership, you can have the same limits against personal liability as any other forms of business entities.
I touch on this same concept in more than one of my books, but the one with the most detailed information is “Best Business Entity For Real Estate Investing.” If you would like to preview it, you can go here on this website to look at it first, use the 3D Flip Reader to look at the Contents and read the first few chapters.
The paperback is available on my Amazon Author Page, along with my other books.
And I have related Articles about real estate investing and other real estate matters from other perspectives on my LinkedIn Page.
I am also active on Quora.com where I have answered over 300 questions, and they have almost 3 Million views.
If you happen to be doing, or if you are considering doing, a Section 1031 Like Kind Exchange, then you should start with a Dictionary, and I have done one, in 3 separate Blog Posts here: Part 1, Part 2, and Part 3. And I have a lot of material for you to consider on my S1031 Exchange website.
You should always check out the credentials of anyone, like myself, who you are relying on for accurate information by looking closely at their Biography. Here’s mine.
And if you think you might like to read one of my books, but can’t decide which one, here are four that I recommend.
I am an Attorney licensed to practice in Texas, North Carolina, Virginia, and the District of Columbia. But I am not your Attorney. I would be honored if I were, but I am not. Reading this Blog does not created an attorney-client relationship between us. Internet content should not be used as a substitute for the advice of a competent Attorney admitted or authorized to practice law in your state or jurisdiction.