In addition to the legal considerations, you should be familiar with the two most common types of business partnerships:
• Limited partnerships: These are often comprised of a group of one or more general partners (which can be individuals or a corporation) who handle property management and operations, and another group of limited partners, who invest money, but are involved in the details of property management. General partners claim a larger share of the profits (as negotiated and agreed upon), almost like salaried employees. Limited partners are more like investors in the company. They can invest even small sums of money and can remain separated from the hassles of ownership. In addition, limited partnerships enjoy some of the risk-minimizing advantages of corporations. If one partner dies or files for bankruptcy, for example, the other partners can enjoy some protection from loss. (Consult an attorney in your state for more detailed information about how a limited partnership can protect you from such losses.)
• General partnerships: These are the smaller “mom and pop” arrangements that most of us think about when we think about partnerships. General partnerships are made up of two or more partners who fully share in the management and buying of property. In addition, all partners share responsibility for legal liabilities, debts, and business losses. As previously noted, frictions can arise over operations and other business issues, such as the departure of partners. (see Real estate Corporations)
What about taxes? All real estate partnerships prepare a 1065 form for the Internal Revenue Service, outlining profits and losses incurred by the partnership. Partners then file this form with their individual returns on which profits and losses are also reported.
Limited Liability Companies
A Limited Liability Company (LLC) combines some of the features of a partnership (see Real estate partnership) and a corporation. They are now the most common way for a group of investors to share ownership of properties.
Here are some of the reasons that LLCs have become so popular today:
• They offer protection. LLCs function as legally separate entities from their owners and offer some protection from legal liabilities and other losses. (Consult your attorney for advice.)
• They are flexible. LLCs can be established so that different investors own different percentages of the organization’s holdings. One individual can own 75 percent of an LLC, for example, while another can hold the remaining 25 percent.
What about taxes? LLCs can be set up so that profits are shared among investors, who report them on their individual returns. There are other tax options with an LLC as well such as the opportunity to take limited profits from the LLC for tax purposes while setting aside some of the income to improve properties or to put toward other business purposes. (Again, consult your attorney and/or accountant for complete information.)
Be aware, however, that there are downsides to establishing an LLC such as attorney and state fees.
In general, partners report profits from the LLC on their individual tax returns. You should consult with your attorney about additional requirements that may apply to an LLC doing business in your state. In many cases, LLCs must also file specialized tax forms and reports and sometimes pay taxes in the states where they do business.
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