Doing a joint venture is an efficient way to pool money, skills and other resources to buy properties. Whenever you do a joint venture you’ll almost always use an LLC.
Not only will you pay less taxes on your profits when you use an LLC, but you’ll also be protected from lawsuits because the property will be owned by an LLC.
So if anybody were to sue you or your partner, they can’t get to your assets. But using an LLC doesn’t guarantee the success of your joint venture.
Real Life Real Estate Joint Venture Scenario
Let’s take a more realistic approach. Say you and your friend both own an LLC. Then you both decide to use that LLC for a joint venture and buy a house.
Everything is going great, until your friend gets sued. Eventually he or she loses the lawsuit. As a result, a “charging order” is placed against all of your friend’s assets.
A charging order is something creditors use to collect someones debt. Since you both chose to use an LLC for your joint venture, the creditors will be entitled to your friend’s share of the profits.
Now your friend probably won’t want to distribute any money from the LLC. Which means you won’t be able to get any of your hard earned money. (As partners, you both have to agree to distribute the money!)
The Best Way To Do A Joint Ventures for Real Estate
This wouldn’t have been the case if you both used your personal LLC’s to do the joint venture.
I know, that might sound confusing. This is how it works: You and someone else each have your own personal LLC. Then you both use your personal LLC’s to become members of another LLC as part of a joint venture.
By being members of an LLC using your personal LLC you’ll be able to distribute your share of the money (to your personal LLC) without forcing your partner to pay off their creditors. This way you’re both happy and your relationship isn’t soured.
I’d be glad to answer any questions you have about using LLC’s to do joint ventures in the comments below.
Learn more about choosing the right partners for your real estate business.