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 – 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 State’s 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.

What Structure Should You Choose For Your Real Estate Investment Partnership?

Unfortunately, this question cannot be answered in an article. It really depends on your unique situation and the state you reside in. As always, I recommend a good attorney be part of your real estate investing team. He/she can guide you in what to do and how to structure your LLC.

Pros

It’s always best to start narrowing your options with a look on the bright side. Here are three pros to forming a real estate joint venture.

1. Pooling Resources – It takes money to make money. One advantage of a joint venture is pooling cash for the purchase and preparation of an investment property. And don’t forget about pooling non-monetary resources too. Your partner’s knowledge, experience and industry contacts can be even more useful than money.

2. Share The Risk – In real estate we can win big, but we can lose big too. It’s just the nature of the game. When we invest alone and lose, we must incur the entire loss. But wouldn’t it be nice to share the loss instead? Entering into a joint venture allows you to do just that.

3. Increase the Chances of Financing – These days getting financing can be difficult. The banks are more tightfisted than ever, especially when it comes to real estate. This can be true even with a good credit score. But banks are more likely to lend when several people share the risk. As a result, joint venture partnering may lead to more money, faster.

Cons

With every decision comes a few challenges, and joint ventures are no different. Let’s look at the dark side of this decision.

1. You have to split the earnings. Shared risk also means shared earnings. I know this is obvious, but it still might hurt to hand earnings over to a partner. This is especially true if you did the work and a partner only fronted the cash.

2. You’re in a relationship. A wise man once said: a partnership is a lot like a marriage. You need to be sure you can both handle the relationship and be willing to work on it when the going gets tough.

You and your partner may disagree often. Or worse, he or she may try to pull a fast one on you. Relationship management aside, the best way to protect yourself is with a solid joint venture contract. Which leads me to my next point…

3. There’s more work and up-front money required at the start. Entering into a joint venture requires a lot of up-front work and attorney fees. It’s important to meet with a lawyer and draft a contract. Although this can take extra time and money, it’s totally necessary for protecting yourself.

In the end, the question of entering into a joint venture is a personal one. If you have the resources including cash, knowledge and experience – and you are willing to take the risk – a joint venture may be unappealing. However, if you need some extra help to increase your chances of investment success, the pros could outweigh the cons.

Looking for more JV advice? Stay tuned to the Investor Insights blog for more tips and advice this month.

Here are three tips for keeping your relationship strong and your real estate investment business successful.

A Little Listening Goes A Long Way

The No. 1 rule of effective communication is to listen carefully and often. Actively listen to what your partner says.

And don’t stop listening when your partner stops talking. Learn to see the non-verbal cues he or she gives as well. Sighs, unwelcoming body language, quick or harsh responses, and strained facial expressions are all indicators that something is wrong. If you see these signs, take the time to ask your partner what’s bothering him or her.

By keeping the lines of communication open and active, you can be sure that misunderstandings and misinformation won’t get in the way of working on your real estate investments.

Don’t Forget to Give

An effective partnership is all about give and take. But it’s easy to forget about the “give” part.

Giving doesn’t always mean money (although it’s important to split money fairly). You should also give your time, your knowledge and your talents to the partnership. This will not only create goodwill, but it can lead to greater success in your business.

The saying, “two heads are better than one” couldn’t be closer to the truth when it comes to real estate investment. If all partners give as much as possible to the partnership, there will be more for everyone to take.

Maintain Professionalism

In a successful investment partnership, you’ll likely spend a lot of time with your partner. You may quickly become good friends, spending time outside of work together at family barbeques, an evening at the bar or grabbing dinner after a long day.

Developing a close relationship is not a bad thing – it’s good to be friendly with your partner. However, it’s important to maintain a level of professionalism.

Why? The expectations of our friends are different than expectations of our business partners. For this reason, we tend to treat a friend different than a partner. This is the number one reason why experts discourage close friends or family to partner in business.

So how do you maintain professionalism? The trick is to be professionally close with your partner, but not emotionally close. Although there is no harm in small talk about our personal lives, it’s best to keep conversations focused on business. In this way, the professional barrier stays strong between partners.

It doesn’t have to take a tremendous effort to maintain a good relationship with your partner. But it does require some work on your part. When dealing with a partner or anyone else in the real estate industry, it’s best to remember the Golden Rule: “do unto others as you would have done unto you.”

A Note About Working with Friends/Family

While it’s not ideal to work with your family or friends, it inevitably happens in this business and every other business. It is possible to work alongside these partners if you establish some ground rules early on:

1. Keep it professional. See the section about maintaining professionalism above.
2. Don’t get personal. Keep disagreements and big decisions focused on the business, not the personal relationship.
3. Protect yourselves with legal agreements. You don’t want a business venture to turn into a lifelong war and end a good relationship. Protect yourselves professionally from the get-go to protect your relationships.

Stay tuned for more insider tips on partnerships and joint ventures this month on the Investor Insights blog.

Feel free to refer back to this post whenever you are unsure of a word.

We’ll start with the obvious term…

Joint Venture – A joint venture, or JV for short, is a partnership formed for a specific amount of time or to complete a specific project. For example, you might form a joint venture partnership with a wealthy investor for the purpose of flipping one particular house. Once the house has been sold, the partnership is over.

Partnership – All joint ventures are partnerships. A partnership is a legal entity formed between two or more people for business purposes.

Joint Venture Agreement – All partnerships, including joint ventures, should be governed by a written agreement. This agreement should be created and/or reviewed with the help of an attorney.

Joint venture agreements will discuss several important points such as:

• Purpose of Venture – For example: to purchase, renovate and sell the property at 123 Main Street.
• Decision Allocation – How much decision making power does each partner have?
• Exit Strategy – How and when will this joint venture end. See “exit strategy” definition below for more information.

Exit Strategy- Because joint ventures are formed only for a specific time period or project, there should be a formal exit plan in place. The exit strategy will be clearly described in the written joint venture agreement.

Trigger Events – As part of your written exit strategy, you should account for various trigger events leading to dissolution of the joint venture. For example: death of a partner or irreconcilable differences among partners.

Shotgun Clause – A shotgun clause can be added to a joint venture agreement. This clause allows for any partner to buy out the other partner. If there is a dispute among partners, this can be a great “out.”

Here is a shotgun clause example:

“At any time after 24 months from the purchase date either party can demand that the property be professionally appraised and then demand either (a) that the property be put up for sale and the proceeds split or (b) that either partner can buy out the other partner for 3/4^th of the appraised value.”

A joint venture can be an excellent opportunity for a real estate investor. But like all real estate investment decisions, we must familiarize ourselves with all aspects of a joint venture before moving forward.

The best place to start? If you already have a partner in mind, schedule an appointment with your attorney to explore your options further.

As a real estate investor, you may come across situations where you need to establish a joint venture or partnership such as:

• Sharing the risk
• Pooling resources including money, contacts, knowledge and experience
• Capitalizing on the strengths of your partner and sharing your strengths with him/her

But what exactly is the difference between a joint venture and a partnership? Let me explain…

What is a Partnership

A partnership is a legal entity formed between two or more people for the purpose of conducting business. As a real estate investor, you might partner with a construction business, wealthy investor or a real estate agent.

Legally, partnerships come in several different forms:

• General partnership – Equal rights, responsibility and risks are shared among partners.
• Limited partnership – Each “limited partner” may limit their risk to the amount of their investment. There must be a “general partner” who is ultimately responsible for all debts incurred by the business.
• Limited liability partnership – Individual partners are personally responsible only for their own acts, not the acts of their partners.

A partnership is formed for an ongoing business relationship. Once you’ve chosen your partners, be prepared to stay with them. However, if you are not looking to stay with your partner long-term, consider a joint venture.

What is a Joint Venture?

A joint venture is a partnership, but with one difference: it’s time sensitive. Joint ventures are typically formed to complete one specific project. For example, you might enter into a joint venture with another investor to purchase and flip one particular house. After that house has been renovated and sold, the partnership ends.

In most cases, limited liability cannot be applied to a joint venture. So, all partners are personally liable for any debts incurred during the joint venture partnership.

What to Do Next

If you are considering a joint venture or partnership, the most important thing you can do is hire an attorney to draft a formal agreement. Even if you know and trust your partner(s), it’s critical to have a written contract in place.

Joint ventures and partnerships can be an excellent opportunity for the savvy real estate investor. Stay tuned for more articles on this topic.