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:
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.
What is a joint venture? When you structure your business entity with partners using a joint venture, you enter into a formal contractual agreement.
A joint venture is less formal, and the contract is usually brief. Here are some of the benefits:
Your joint venture provides asset protection if done correctly with proper infrastructure (LLC, DST).
Like any entity structure with partners, a joint venture has some disadvantages, which we will cover here:
An LLC can have complex partnership clauses in its operating agreements. Ideally, they’ll have partnership clauses built into them.
An LLC provides more control and durability than a joint venture. Here are some additional benefits of an LLC:
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:
Although there is added cost and maintenance with an LLC, it provides much more protection than a joint venture agreement.
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:
Similar to a traditional LLC, a Land Trust With Series LLC gives you more control. Some additional benefits include the following:
A Land Trust and Series LLC are formal agreements. That means there will be additional regulatory requirements and costs for maintenance.
You’ll need to choose clauses. There are some universal clauses, but many will be unique to your situation, goals, and plans.
There are three broad categories of clauses you need to be familiar with regardless of the structure your choose:
Timing clauses avoid confusion and avoid disputes between partners. The clauses determine the following:
The ownership and responsibility clause defines the expectation of each partner. The clauses determine:
Dispute clauses provide the mechanism or agreement for resolving disputes. The clause control:
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:
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.
Scott Royal Smith is an asset protection attorney and long-time real estate investor. He's on a mission to help fellow investors free their time, protect their assets, and create lasting wealth.
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