General Partnerships for Real Estate – For the beginnings of a real estate business, a general partnership can have many advantages. From tax benefits, to an easy formation process, this type of business partnership is great for real estate investing. We give you a detailed overview, explaining how to form a general partnership, the benefits and disadvantages of general partnerships in real estate, and answer the most important questions, to help you decide: Is a general partnership a good decision for my real estate investment business?
General Partnership: Formation, Advantages and Disadvantages
Many people want to go into business with a partner. This has many advantages over working alone. You have someone to carry you through struggles, and someone to turn to for decision-making. There’s also the fact though that you have someone who is interfering with the decisions that you would like to make. This can be hard to handle, but can be worth it. In the following we show you what a general partnership is, its advantages, how it is formed, and much more.
Definition and Basics: What does a General Partnership Mean?
The official definition, according to the state of California is “a form of business entity in which two or more co-owners engage in business for profit”. In practice it means two individuals share liability, profits, and losses from real estate investments. Important: this form of doing business is unincorporated, meaning that it is not separate from the people doing the business. It also has, by definition, more than one owner.
- A form of business entity in which two or more co-owners engage in business for profit
Forming a General Partnership: Business Name, Licenses, Agreements, etc.
In forming a general partnership, the first step is to choose a business name for the partnership. This is important, as you need to make sure that the name is not taken by another company or partnership. To do this you search your local district’s registry, the state secretary’s and so it does not infringe on a trademark or service mark the United States Patent and Trademark Office and the Register of Trademarks and Service Marks. Next, you draft and sign a well-written partnership agreement.
Next, back to the secretary of state, where you file a statement of general partnership. Many people skip this, as it is not obligatory, and you can avoid the $70 filing fee and the $15 fee. In the same step, you register the name of the partnership at the local level by obtaining a fictitious business name. Next you must set up a separate bank account for your partnership. You should try to keep your personal finances separate from your business finances. Finally you obtain the local business licenses and specialty real estate licenses (these differ between states).
- Choose a Name
- Create a Partnership Agreement
- File Statement of General Partnership and Register Name
- Open a Partnership Account
- Obtain Permits and Licenses
- Partnership Agreement
- Statement of General Partnership
Advantages: Filing Fees, Stress and Flexibility
The first advantage is not the most significant, but perhaps important for partnershiips with limited time and finances (we do not recommend this). A general partnership is not as legally binding as other forms of business entities, and therefore is not necessary to be filed at the state level. Therefore you can skip the filing fee and hassle with the secretary of state. It is also in general a less stressful form of business, as there is less bureaucracy and it is less legally protected. Lastly, the biggest advantage of a general partnership is that it is very easy to convert to an LLC. This makes it a great stepping stone for those not ready for the total commitment of an LLC.
- No filing fee
- Less stressful
- Flexible to convert
Disadvantages: Structure, Liability and Disagreements
The main reason most people form a business is to avoid liability. This is unfortunately not the case for general partnerships which are not subject to liability protection, as they are not entities separate from their owners. An additional problem comes from the fact that general partnerships are often formed between two individuals who already know each other. Even when this is not the case, a common problem, as there are only two people in the partnership, is that owners disagree. This can lead to conflict and far-reaching issues. The lack of structure is another and the final disadvantage of general partnerships
- No liability protection
- Owners can disagree
- Lack of Structure
Real Estate General Partnership: Advice, Tips for Real Estate Partnerships
Different from other types of ownerships like C corporations or S corporations, a general partnership is considered the original partnership, and is also the least complicated. There are still a few details to keep in mind. Including how to structure a real estate partnership (whether limited or general), and the utmost importance of a partnership agreement. Lastly, we also answer the common question, if general partners are a necessary part of a partnership.
- Structuring a Real Estate Partnership
- Partnership Agreement
- Does every partnership need a general partner?
Structuring a Real Estate Partnership
The structure of a real estate partnership can be a complicated thing. It is important to take your time with planning this, and making every step of it as perfect as possible. To avoid mistakes, get a primer on how to structure your partnership with the video below.
Partnership Agreement – Most Important Part of a General Partnership
When investors in a general partenrship buy a property, each general partner has an equal right to participate in the management and control of it. From a practical perspective, this means that determining how disagreements that arise in the ordinary course of business will be handled is of paramount importance. The partnership is free to designate a different method of decision-making and provide for it in writing either in the partnership agreement and/or an amendment thereto. In the partnership you will detail how decisions are made, how votes are made, and if you need e.g. a majority or unanimous vote.
The partnership agreement is make or break!
Does Every Partnership Need a Partner?
Yes. Every partnership, including limited partnerships, and limited liability partnerships (not to be confused with limited liability company), need at least one general partner. This is the person that makes day-to-day decisions, and takes the brunt of liability. They also make all legally binding decisions, as it is them who are liable for any legal consequences.
- Yes, every partnership needs at least one general partner who makes day-to-day decisions
Taxes: Pass-Through Structure
There are a few benefits to taxes in tthe world of general partnerships. Firstly, general partnerships, unlike corporations, do not pay income taxes. We go in-depth on the details you need to know, below.
- Are Partnerships Tax Exempt?
- Do all Partners pay the Same Amount of Taxes?
Are Partnerships Tax Exempt? Tax Structure of General Partnerships
Yes. General partnerships are tax exempt. The business itself does not pay any income taxes. Rather, the general partners pay income taxes. In other words, profits, losses, etc. all pass through to the partners directly.
- No, all income and losses pass through directly to partners and are taxed as their incoome tax
Distribution – Do all Partners Pay the Same Amount of Taxes?
This can be decided by partners. Otherwise, the IRS taxes every partner equally. This can be advantageous, e.g. if you are an existing partner and a new partner joins, in which case the amount of tax reduces. If you are made a partner though, then you become owner of the partnership’s assets, and also liable for taxes.
- Partners decide whether everyone pays the same amount
General Partnership – The Original Partnership
The general partnership is the classic, the original type of partnership. It is attractive often mostly for beginners or those who are not yet certain that they will enter an LLC or the direction their business will take. It has many advantages though, and is a good decision for many who choose it.
Comparison: What is the Difference between a General Partnership and Limited Partnership
The difference between a general partnership and a limited partnership is that a general partnership consists only of general partners, all of whom carry liability. Limited partnership has additional partners who are not liable (so-called limited partners). General partnerships and limited partnerships are often misconstrued, due to the important difference between a partner and partnership. A limited partnership also has general partners.
- Limited partnerships are general partnerships with additional partners who do not carry liability (limited partners)
- General partnerships consist only of general partners