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.

Can An LLC Take Out a Rehab Loan?

Yes, an LLC can take out a rehab loan if it is a private, portfolio or hard money loan. Conventional lenders won’t allow it on residential property financing.

And if you go through private, portfolio or hard money lenders your LLC usually has no seasoning or cash flow requirements either. (That means it doesn’t have to be 2 years old and making money.)

On June 24th, the Supreme Court of Florida handed down a 3-2 decision that allows a creditor to seize the ownership interest of a single-member LLC.

Download a pdf of the decision here.

This is bad news if you hold real estate in a single member LLC in Florida as you just lost your asset protection in the case of a judgment. So far no word on multi-member LLC’s.

Check it out here…

http://www.lassiterrecommends.com/privatemoney

If you decide to grab a copy of the course, I have a special bonus package for you featuring MORE free training with ME personally.

Check it out and let me know what you think.

http://www.lassiterrecommends.com/privatemoney

Let me give you a few examples of what I mean.

A few years ago, I saw the writing on the wall with regard to stated income loans. I just knew that they were going away. (If you’re thinking, “What? Whaddya mean no more stated income loans?” then you especially need to keep reading).

I had several self-employed residential mortgage clients that were going to be affected by that so I contacted them all two years in advance and told them that if they wanted to be able to continue to use conventional loans to finance their properties they needed to start showing income on their taxes. What was the response?

“Yeah, but then I’ll have to pay more taxes.”

Last week one of the investors contacted me and was desperate for a refinance of one of his properties to pay off a private lender. Yep, you guessed it.  He had no income on his taxes to document his income and owns more than 4 properties so he is unfinanceable.

He asked, “What should I do now?”

I told him that he could start working with portfolio lenders to refinance his properties into his LLC so he can pull them off of his personal credit. They also may be a little more lenient in the income qualification – using deposits and business income.

He said, “Yeah, but the rates are higher than what I have right now.”

People, the “yeah, but” is lethal.

Real estate investing (like a good marriage) is a series of compromises. You have to weigh the consequences of your decisions. Pay taxes and remain financeable or don’t. Lose a little cash flow to become financeable or don’t. It’s your decision. But that decision will have consequences.

The investor in this example is stuck. He has “yeah, butted” his way right into failure.  He is still trying to do business the same way he has always done it and he is so entrenched in his ways that he is losing tons of opportunity.

What about you? Are you still trying to run your business using outdated strategies? Or are you flexible enough to pay attention and take the advice of the ones who are doing their best to advise you?

Be smart enough to immerse yourself in “what’s working now” because I guarantee you it isn’t the same stuff that worked a few years ago.