LLC with business partner? need advice

My husband and I have been propositioned to be in a “partnership” with a family member where we purchase investment properties and either flip them or rent them out. The reason is sounded like a good deal is because none of us had money for the full down payment of a property on our own. The person proposed that we form an LLC and split everything 50/50. My issue with that is that my husband and I are two people and I am sure that I will be doing just as much work as him and the third person. I do not feel that just because we are married, that we should constitute half of the deal together. In addition, each of us has 1/3 of cash, equity, and retirement money. I would not be using any retirement money. I was told by the lender that I use that when purchasing a second rental property that I would need to have 6 months worth of mortgage payments for current and future mortgages. She informed me that I wouldn’t need this in cash but that I could provide proof of this money in the form of retirement accounts.

I understand that I need to go see a lawyer because I am not very familiar with anything in real estate law or business partnerships. However, I want to have a basic plan laid out to discuss with the third partner before we get any further in the process and seek legal advice.

One person gave me financial advice and suggested that not only do we split it into thirds, but that each person should bill back the company an hourly amount for the work they performed. They reasoned this would ensure that each person was compensated for the work they did. I am curious to know how others in this field think this should be divided and how the work should be computed or compensated.

I asked opinions on another website and was told that there was no way the third person would go for the third way split and having an hourly wage. I know having each person be paid for each hour worked will take more time to track but I think it will cause less problems. I can already see in businesses where one person does less work than everyone else but expects to get the same profit. Plus the guy I would be working with already stated that he didn’t want to have a payout of profits often. He wants the money to be reinvested. Having an hourly wage would provide compensation to each person and make it easier for them to reinvest their profits.

Thoughts?

Hi,

Wow, that was a lot of information in a small posting. You and your husband will ultimately have the ability to out vote your third partner simple by numbers, contributions and ability to perform work.

If all things be equal you could obviously go into business in thirds, but if the third person is not putting up 50% of the capital and intending to match hour for hour every hour put into the property then it needs to be handled fairly.

One third ownership of nothing will always be nothing, but one third of say two homes bought, rehabbed and flipped this year can provide for example a $60k profit or an individual return of $20k, and that’s nothing to sneeze about as when you get experienced and have the capital you could be doing 20 or 30 rehab flips a year or more.

Now rather than pay directly for hours worked you could keep track of hours, total them at the end of the project and only pay an agreed upon cash difference between you and your husband and your partner, this involves trust and accountability but can be accomplished if everyone is studious at keeping track of hours and time.

One thing you clearly want to do is reduce your plan to paper and determine what your vision is as all three of you need to be of common agreement and on the same page. Do not overbuild your rehabs as your throwing money away, however your finishes will be somewhat different on each home according to value and location.

IE: We don’t install travertine or granite counter tops in a $80k home and we do not install Formica counter tops and Vinyl flooring in a $300k home.

You don’t say who this person is but I have done projects with my parents and siblings where we were 50 / 50 regardless of marital status assuming the unmarried one would one day be married! But I probable have a second cousin some where I don’t like who I might try to only give 1 or 2 percent of a partnership to and make them work for $0.05 cents a day?

But ownership of the company can be different (50/50) from individual initial contributions simple by agreeing that during the next 12, 24 or 36 months your principle dollars will be returned with a 8% per year interest return, which then makes it where no one has an investment in the company for the long term.

Then treat working hours as a plus or minus adjustment for a specified amount per adjusted hour.

I have got to figure out who that second cousin I don’t like is? Hmm

                      GR

Another option is to split the profits according to the total percentage of cash outlay. For example, if you are buying a $200,000 investment property and the 3rd partner puts up 50% of the down payment (let’s say $20k) but you and your husband spend an additional $10k in repairs plus your $20k down payment, then you should be entitled to 60% of the profits ($30k/$50k).

Though charging for time sounds nice on paper, it does not always work well in real life. What happens if you show up at the property and find partner #3 sucking beers and doing nothing, only to find out he has been there since 6 am on the clock?

You are better off keeping track of your receipts (which will equate to who is doing the most labor as well) and basing the profit split on the total investment.

First: I would never recommend going into business with family. There are just too much emotions wrapped up in investments like this (as you already allude to in your post) and if things go bad all it does is screw up Christmas and birthdays for everybody. That said…

Second: If you do move forward PUT EVERYTHING IN WRITING. Who does what. Who gets what in return. What happens when you can’t sell the darn thing. Who puts cash in when it doesn’t sell and taxes are due and you’re out of money. What happens in return? Exit strategy. Plan B. Plan C and D. Who gets the call at 2 am when the copper is stolen from the A/C and the police noticed a broken window. What happens when the family mamber gets divorced and hostile ex-wife is now a defacto partner with lots of opinions and no cash? EVERYTHING. IN WRITING. BY AN ATTY. It minimizes the first problem identified above.

Third: Remember business is business and everything else is something else. Don’t mix the two.

I was called in by a judge some years ago to act as trustee (I had previously done a partnership tax return for them) when two brothers SUED each other because one had a heart attack and couldn’t work and the other brother got tired of carrying his part of the business. They couldn’t work it out, I was ordered by the judge to liquidate (sell everything) the partnership assets, pay the debts and close the business. They ended up getting $32 (yes, that’s thirty two dollars) each after the bills were paid.

No partnership agreement. No exit strategy. No specific understanding between them about what would happen if something happened. And now they will probably never speak again.

Excellent advice here! No matter what you decide, NEVER EVER, just leave things as a verbal agreement. our memories are not always dependable when we want them to be and even worse when we wish we had not agreed to something.

Having an attorney and or notarized witnesses is an added protection to keep it business and not personal.