Establishing A Partnership With A Long-time Friend
I am a newbie. A long-time friend and I are evaluating entering into a property together.
While we both bring different skills to the table and would enjoy doing business together, (not exclusively), I want to make sure that we do everything to set our expectations and understandings up front so there are no surprises later and our family friendships remain in tact.
We have talked about doing everything 50/50. So, the question is how do we do that? Should we both be on the note together so that we can both deduct interest? If so, do we need to qualify together for the loan, or can one of us qualify and just have the other listed on the loan? Should we both be on the title to get the benefits of the depreciation? From an accounting perspective, if we were to rennovate the property and then rent it, how can the money flow in so that neither of us has to recognize as taxable income the half of the rent that will need to go to the other guy?
Are there things I am not thinking of that I should be considering?
I hope these questions are not too ignorant. Thank you in advance for your help and insights!
I would merely set up an LLC and then designate which one to handle.
Or, I would do a LLP. One of you the one that likes to play in the dirt will become the general partner and the other just a limited partner. The general does the deed and has lunch on occasion with the Limited Partner and when the money comes in you perform as per agreement. 50/50 or General is entitled to a fixed sum then split above that whatever you have worked out.
I do not suggest that both close friends go into a deal where your skills are outside of real estate. If one is a carpenter and the other is an electrician maybe it will work. But I doubt it. I just use the limited Partnership and then split out the returns based on who owns what percentages of the partnership.
I have only been shot at once utilizing this system. She missed.
Lucius 8-) 8-)
Try forming an LLC. You can be a 50% member and him the other 50%. Do the deal, then dissolve the LLC.There are companies that will LLC you ,in Nevada for about $150. Pm me if you need their websites
Good luck
Joe
She missed?
No matter what kind of business structure that you choose (LLC, LLP, S-Corp, etc) have an attorney draw up a partnership agreement. This document should define each of your responsibilities, how you make decisions. who has what authority and how you resolve conflicts. Also, make sure the document has language on how to disolve the business and distribute the assets if one of you wants out.
I cannot stress how important such written agreements are. I learned this lesson the hard way when a partner depleted a joint credit line for his personal use. Without written agreements that credit line was his (or mine) to use any way he wanted to. I want make that mistake again.
More importantly, written partnership agreements minimize misunderstanding and conflict down the road.
The advice so far has been right on target.
Best way to screw up a friendship is an unwritten or poorly written partnership agreement.
Do share the cost and have a lawyer do it as he/she will think of things you don't, and it will be done well...and have mechanisms to protect you both & also give you some tools to help you resolve arguments and impasses.