Mark Kohler explains why a handshake deal on rental property with a partner creates a general partnership that exposes you both to each other's liabilities. An LLC with an operating agreement protects you, defines ownership percentages and profit splits, and keeps the partnership's assets separate from personal ones.
Chapters
If you've got a partner, you have a new relationship, and that relationship has to be defined. What you need is an llc, a partnership llc. So let's look at the trifecta. Let's look at the asset side for a minute. So you're over here, and you've got this LLC with your little rental property in it, and it's owned by your trust, and all the profits are going down to your 1040. It's great. And then your best friend from college calls you up and says, we got to go buy a rental property together. And you go, let's partner. Well, you do not want to do this on a handshake. You want to have protection from any action of your partner. Because if you don't have an LLC and you shake hands in your partnership, that's a general partnership. And you're subject to the general liability, the vicarious liability of whatever your partner does, we don't want that. And we want to define our relationship. So what we do is form a new llc. It's a partnership llc. And in this partnership, we're going to have an operating agreement. And this little op agreement is going to define who does what, who gets what, what the percentage of ownership is. And you might be 50, 50. All right, that's cool. The LLC is going to define it. It's going to have its own bank account, its own ein. It's going to have the project, whatever it is that you're partnering on. Your partner might have an llc, maybe another trust. It doesn't matter. That's their world. But in your world, we're either going to have your holding company own it or your trust own it. And this LLC is going to continue to make money and build wealth. And when you partner, it can be a phenomenal thing.
