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How Should You Structure Your Real Estate Partnership?

A partnership occurs when two or more people join together for business purposes. Itís a legal entity recognized by the state where the partnership was formed. Partnerships can take many different forms based on risk allocation and tax purposes. Letís take a look at some common partnership structures.

A word of caution before we proceed: Each state may have slightly different rules and regulations governing partnerships. Take the time to sit down with your attorney and hammer out the details.

General Partnership

In a general partnership, all partners are equally liable for any legal actions or debts of the business. In addition to equal liability, all partners are also jointly liable. This means all partners can be sued as a group. Additionally, as a partner you are liable for the unlawful acts of another partner or employee of the business.

In a general partnership, all partners get equal voting rights regardless of how much capital any one partner invested. As for tax purposes, a general partnership has one level of taxation Ė similar to a sole proprietor. This means that profits are passed through the partnership without taxation and distributed directly to the partners.

No local or state filings are required to start a general partnership. However, it is highly advisable to have a formal agreement in place.

Limited Partnership
 

In real estate investment, a limited partnership may be formed if one partner is supplying the majority of capital but does not want to be involved in the day-to-day operations.

All limited partnerships have at least one general partner and at least one limited partner. A general partner has unlimited personal liability, while a limited partner is personally liable only up to the amount he or she invested in the business.

However, a general partner has full voting rights and control over the business while the limited partner does not.

For tax purposes, a limited partnership is similar to a general partnership in that the business is not treated as a separate taxable entity. So all profits pass through the partnership directly to the partners without added taxation.

In most cases, you need to file with the Secretary of Stateís office to form a limited partnership.

Limited Liability Company (LLC)

By far the most popular form of partnership is the limited liability corporation, or LLC. In an LLC, all owners are not personally liable for the business debts.

In this structure, partners may elect to have the company taxed as a corporation or a partnership. In the vast majority of real estate investment situations, the partners would elect to be taxed as a partnership rather than a corporation. This way profits are passed directly to the partners without additional taxation.

Of the three structures discussed in this article, an LLC is the most difficult and expensive to set up. All states require paperwork to be filed and an LLC operating agreement to be completed. The LLC operating Agreement sets out the rights and responsibilities of all partners.

 

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