| Sternberg brings his "in the trenches" expertise after | | | | The general partner of a limited partnership can itself |
| 30+ years as a real estate investor to the 2nd | | | | be a corporation or LLC to lessen liability issues. |
| installment of this series. This article is a must read for | | | | However, this doesn't mean that a limited partner can't |
| any investor dealing with and understanding general | | | | be part of, or have a vote in, major decisions that |
| title issues in real estate. | | | | affect the partnership. |
| Partnerships | | | | Here are the advantages of a limited partnership: |
| As the name suggests, partnerships consist of two or | | | | As a limited partner, you can invest even though you |
| more partners who join together to acquire, operate | | | | don't have expertise or the time to devote to being a |
| and hold real estate. It's an effective way of pooling | | | | hands-on part of the business. You can take on the |
| capital and talent. A key feature of a real estate | | | | financial risk but not the liability risk. Partners are able to |
| partnership is that the investors don't actually have the | | | | allocate profits, losses and gains as they see fit, |
| title or ownership directly in acquired properties. Instead, | | | | regardless of the equity interest of a specific partner, |
| they own a partnership interest. | | | | subject to compliance with tax laws. The general |
| Partnerships usually take two formsgeneral and | | | | partners prepare an IRS Form 1065 for the partnership. |
| limited. | | | | Each partner then prepares his or her own tax form |
| General Partnerships | | | | listing all profits, losses and depreciations. It's a |
| In this setup, each partner possesses the right to fully | | | | "pass-through" operation with profits passing through to |
| participate in property management and operations. | | | | the partners who then include their allocated income on |
| General partnerships have the following advantages: | | | | their personal tax returns. It's much easier to attract |
| They're easy to set up and maintain. You don't have | | | | investors as limited partners. It allows general partners |
| to register with your state and pay fees, as you do to | | | | to use their expertise, make key decisions and |
| establish a corporation or limited liability company (LLC). | | | | manage the business. Limited partners can leave the |
| You can file income tax returns with relative ease. This | | | | business or be replaced without the need for the |
| is because a general partnership is normally a "pass | | | | limited partnership to be dissolved. |
| through" tax entity. This means the partners, not the | | | | Disadvantages of a limited partnership include the |
| partnership, are taxed. Unlike a regular corporation, | | | | following: |
| there's no need to file separate tax returns for the | | | | Filings, formalities and state requirements mean a lot of |
| corporate entity and its owners. General partnerships | | | | paperwork. If you're a general partner, you assume |
| offer flexibility. Partners are able to set their | | | | personal liability. Limited Liability Companies (LLCs) This |
| responsibilities and benefits as they see fit or as the | | | | is hybrid form of ownership that combines the |
| needs of the business dictate. The flexibility extends to | | | | properties of a corporation and partnership. It has |
| distribution of profits and losses. So, for example, an | | | | several advantages: It provides the flexibility and tax |
| individual partner can reap higher profits for taking on | | | | advantages of a partnership while maintaining the |
| more financial risk. | | | | limited-liability benefits of a corporation. |
| A partnership is considered a "discrete' asset. Because | | | | Like a corporation, an LLC is a separate legal entity |
| of this, it can be transferred to other people, heirs, or | | | | that limits the liability of its members. However, it has |
| estates unlike a sole proprietorship. Transference is | | | | the tax benefits of a partnership. LLCs are also free |
| usually limited by the terms of the partnership | | | | of many of the legal requirements that govern |
| agreement. | | | | corporations (including annual reports, director meetings, |
| There's one primary disadvantage of general | | | | shareholder requirements and so on). LLCs are a |
| partnerships: | | | | "pass through" tax entity, which means company |
| One business-related act of a partner can make all | | | | profits and losses are passed through the business |
| partners legally liable for that act. So it's important that | | | | and taxed solely on the members' individual tax returns. |
| you enter into partnerships only with people you trust. | | | | Members can hire a management group to run the |
| Then back up that trust with a written partnership | | | | LLC. This group can consist of members, |
| agreement that establishes the following: each | | | | nonmembers, or a combination. Members can split |
| partner's share of profits or losses, day-to-day duties, | | | | profits and losses any way they wish. Dividend |
| and what happens if one partner dies or retires. | | | | distribution is nontaxable, unlike an S corporation, where |
| Limited Partnerships | | | | dividends are taxable. An unlimited number of |
| This ownership form differs from a general partnership | | | | members may join a single LLC, and most states allow |
| in the role and responsibilities of the partners. It consists | | | | single-member LLCs. An LLC may affiliate with other |
| of one or more general partners and one or more | | | | businesses, unlike an S corporation, where that ability is |
| limited partners. Typically, the general partners run the | | | | limited. |
| operations of the business while the limited partners | | | | Disadvantages of LLCs include the following: |
| provide capital and help arrange financing while not | | | | Costs can be greater. Some states impose income or |
| taking an active role in running the business. In return | | | | franchise taxes on LLCs or require LLCs to pay |
| for their investment, they receive a share of the profits | | | | annual fees to operate in that state. Lack of legal |
| for their involvement as limited partners. | | | | precedent. Because LLCs have existed as legal |
| Statutes regarding limited partnerships vary by state | | | | business entities only since 1996, there's not much legal |
| so you'll have to check with the appropriate | | | | precedent available to help owners predict how legal |
| government agency for a definition of the obligations | | | | disputes may affect their businesses. Every state has |
| and responsibilities of partners in this type of business | | | | its own requirements so check with an attorney who |
| arrangement. The partnership is required to file with the | | | | specializes in LLCs before deciding to form or join a |
| secretary of state and must also file various reports. | | | | limited liability corporation. |
| A key feature of a limited partnership agreement lies in | | | | In the next and final installment of this series, I will |
| the area of liability, which falls on the general partners, | | | | discuss corporations. Both advantages and |
| and typically not on the limited partners. For this reason, | | | | disadvantages. |
| individuals are reluctant to be general partners. | | | | |