Partnership Structure?


I have been asked by a few friends with money (inexperienced, passive types) to start a RE partnership so they can partake in the real estate game without going through the hassel and learning curve. I have done quite a bit of rentals for myself, but have no experience with partnerships.

What would be a good structure for say 2-3 active partners and 10-15 passive partnerships? Everyone will have money in the partnership (active & passive). I imagine whoever is doing the buying/selling/managing work should get compensated. And maybe extra bonus for high performance?

Any ideas/examples you can share would be appreciated.

LLP sounds like what you want. That’s where you have silent investors that give you money and you’d be the one with operational control over it. I’m sure if you google LLP you’ll find some resources that explain it far better than I can. You should talk to an attorney and CPA before finalizing anything though.

In addition to the organization form (which I assume LLP is the best), I would love to hear ideas about how the managing partners can be fairly compensated for their efforts? Should it be by time spent? By results? By increased ownership?

That’s seems to be to be the tricky part…

One way is profit is split 50/50 or however many times to make it even. If you manage it, you get a fee, and that fee would be an expense subtracted from the profit.

Bad assumption. An LLC provides superior asset protection over the LP, and has the added bonus that you have more flexibility in taxation and distribution options.

Rental income is passive to all partners (or members), regardless of their level of participation.

One approach to compensation would be to pay the manager a % of rentals (as you would to an independent management co) and then split profits by ownership percentage. With an LLC, you can structure the payout however you desire with or without regard to ownership percentage, giving you great flexibility. For example, any member who brings in a deal can receive a “finders fee” for originating the deal, then pay the manager fee, then split what’s left. whatever.

You have to watch the special allocations that come with creative ways to pay investors. Every special allocation must have serious economic effect on the investors/partners receiving special allocations.

Also, in regards to these hands off, investors (members, partners…whatever you want to call them), there are a bunch of questions regarding securities law, because they’re making money off of the work of others - like share holders of a corporation.

Books I’ve been reading tend to recommend possibly looking into using S-Corp taxation by filing appropriate paperwork - this may help to avoid any questions of securities and also may work to lower your member taxations, but will also open your LLC up to double taxation…I think, but not sure.

Best to consult a COMPETENT CPA/Corporate Tax Attorney.

Also, look into how making the LLC either a member managed vs. a manager managed entity will help/hurt you and/or investors.

S-corp avoids double taxation. It’s a C-corp that has that issue.

Any time you have “outside” investors, you must make sure that you aren’t creating a “public offering,” as that will get the SEC on your back. However, whether the deal is a partnership or corp will have no effect on whether it is a public offering. You’re probably not in danger of making a public offering, but if you have doubts I can dig up those rules for you.

Keep in mind that the LLC gets to choose partnership or corporate taxation (and still maintain the superior asset protection of the LLC). Each has its advantages and disadvantages, and your particular circumstances will dictate which is best for you.