A partnership can be wildly successful and rewarding for all the associated parties. It can also become an emotional and financial nightmare. Think of a partnership like it’s a business marriage. Forming a true real estate partnership is fraught with a lot of potential pitfalls, not the least of which is the creation of a legal entity that will have its own name and identity. In the eyes of the law, your partnership is a person.
Like any couple considering a marriage, you’ll probably want to have a lot of conversations to ensure that you share the same vision for the future. Start by asking each other these questions:
- How much capital are you willing to contribute to start the partnership, and are you willing to contribute if there’s a future financial need?
- What’s the percentage of ownership (50/50)?
- What is your, and your partner’s, personal financial situation?
- How much time should each of us devote to the business?
- What kind of business entity are we creating (LLC?) and how will we report annually to the IRS?
- How do we determine who works with a lead we receive from a joint advertisement?
- How do we split the income and expenses?
- Before we make a decision on an expenditure, must both of us agree?
- How do we resolve an issue on which we just can’t agree?
- Will we hire administrative staff and who will oversee them?
- The three big questions:
- What happens if one of us dies?
- What happens if one of us gets married, or divorced?
- What happens if one of us becomes disabled?
- What’s our exit strategy?
- How do we split the database?
- How do we split the partnership’s assets and liabilities?
- Who will file the partnership’s final tax return?
After conversation, you and your partner may find workable answers to all these questions, but aren’t you glad you had the discussion? Once you come to an agreement on these and any other points your conversation uncovered, you’re ready to put it in writing. Your first good business decision will be to hire an attorney to draw up this agreement and file any other legal documents for its creation. Just consider this one of your business’ start-up costs.