Best Practices Structuring Entities With Partners

The first thing you need to consider for your business is choosing a structure. Jason Marino, Esq., staff attorney with Royal Legal Solutions, offers his expertise on best practices when structuring entities with partners.

This decision should be made among you and your partner(s) and will impact your business in the future.

You’re looking for low-cost and efficient structures as a real estate investor. According to Marino, the structures that meet those criteria include:

• Joint Venture Agreements
• LLCs 
• Series LLCs

You can use other structures, but these are ideal for real property. In this article, we’ll discuss the ins and outs of each of the structures and how they affect you as a real estate investor. 

Structuring Entity: Joint Venture

What is a joint venture? When you structure your business entity with partners using a joint venture, you enter into a formal contractual agreement.

Benefits Of Structuring Your Partnership As A Joint Venture

A joint venture is less formal, and the contract is usually brief. Here are some of the benefits:

• You can avoid and control internal disputes
• It’s easier to terminate
• You’re less tied to it
• Good for one-of projects
• Low-cost
• Low maintenance

Your joint venture provides asset protection if done correctly with proper infrastructure (LLC, DST). 

Disadvantages Of A Joint Venture Structure

Like any entity structure with partners, a joint venture has some disadvantages, which we will cover here: 

• Don’t adapt well to complex projects
• Lacks asset protection
• Long-term projects don’t work well with a joint venture

Structuring Entity: Limited Liability Company (LLC)

An LLC can have complex partnership clauses in its operating agreements. Ideally, they’ll have partnership clauses built into them. 

Benefits Of Structuring Your Partnership As An LLC

An LLC provides more control and durability than a joint venture. Here are some additional benefits of an LLC:

• Provides more detail and sophisticated control over a partnership
• Avoids and controls internal disputes
• Asset protection included

Disadvantages Of An LLC Structure

An LLC is more complex and requires you to register with the secretary of state and requires additional actions for proper upkeep. For instance, you have: 

• More formality
  • Registered agent
  • Bank account 
  • EIN 
• More maintenance
  • Annual or biannual compliance with the secretary of state
  • Franchise tax filing
• Higher cost
  • Filings with state
  • EIN 
  • Operating agreement

Although there is added cost and maintenance with an LLC, it provides much more protection than a joint venture agreement. 

Structuring Entity: Land Trusts With Series LLCs

A Land Trust with a Series LLC is related to the traditional LLC we discussed above, but it has some additional benefits for real estate investors. 

The primary benefit is the flexibility in adding partners at various levels:

• Land trust level is for partners involved in a single project
  • Anonymity 
  • No asset protection
• Child series LLC is for 3rd party partners who don’t want to use their entity
  • Limited to one project
  • Get protection from LLC 
• Parent LLC level is for family or highly trusted partners
  • Deeply involved in business operations

Advantages Of Structuring As A Land Trust With Series LLC

Similar to a traditional LLC, a Land Trust With Series LLC gives you more control. Some additional benefits include the following: 

• Detailed control over a partnership
• Avoids disputes
• Asset protection with parent and child LLC

Disadvantages Of A Land Trust And Series LLC Structure

A Land Trust and Series LLC are formal agreements. That means there will be additional regulatory requirements and costs for maintenance. 

• More formality
  • It replicates itself into child series, which can require more bank accounts
• More maintenance
  • Maintenance of an LLC
  • May require individual record keeping for each child LLC 
• More cost
  • More protection = more cost
  • Scaling cost is lower than having individual LLCs

I’ve Chosen A Structuring Entity With My Partner; Now What?

You’ll need to choose clauses. There are some universal clauses, but many will be unique to your situation, goals, and plans. 

Choosing Clauses For Your Structuring Entity

There are three broad categories of clauses you need to be familiar with regardless of the structure your choose: 

• Timing 
• Ownership and responsibilities 
• Dispute

Timing Clauses

Timing clauses avoid confusion and avoid disputes between partners. The clauses determine the following: 

• Duration of the partnership 
• Notice to each partner
• Payment of partnership profits

Ownership And Responsibilities 

The ownership and responsibility clause defines the expectation of each partner. The clauses determine:

• Ownership
• Who makes decisions
• Profit sharing
• Partner powers

Dispute Clauses

Dispute clauses provide the mechanism or agreement for resolving disputes. The clause control: 

• Dispute resolution methods to avoid lawsuits
  • Mediation
  • Arbitration
  • Lawsuit (usually as a last resort) 
• Non-compete clauses

Key Takeaways

The best practice for structuring entities with partners depends on your specific situation, future goals, and open communication. 

In general, as a real estate investor, you can structure your business using the following: 

• Joint Venture
• Traditional LLC
• Land Trust with a Series LLC

After determining your entity structure, you must hammer out the clauses. Your specific circumstances dictate which clauses you will need. 

Do you have questions about structuring your entity with a partner? We have answers! Join Royal Investing Group Mentoring to link up with our subject matter experts. They will happily teach you more best practices for structuring your business and answer other burning questions.