Partnerships can be a great way for investors to build upon or expand a business, especially if they have a particular need, such as liquidity, credit availability, or a specialized skill, such as that of property management, which is the example we will focus on.

One definition of a partnership is:

A business organization in which two or more individuals own, manage, and operate the business where all owners are equally and personally liable for the business debts.

Partnerships come in several forms:
• General partnership
• LLC
• LLP
• S-corporation
• C-corporation

How often have you heard another person complain about a business partner? My guess is that we have all heard such lamentations frequently. As is the case in many areas of life, if we take care to put the right systems in place, take the appropriate precautions, and properly evaluate people and situations, we can increase our potential to avoid many of the pitfalls of partnerships.

So often, we go into relationships—business and otherwise—wearing rose-colored glasses which make it nearly impossible to identify obstacles or areas of concern. The newness and promise of the newly-founded venture makes all the negatives seem easily dealt with, or even non-existent. Proper planning for important roles and responsibilities are overlooked and left to be dealt with as they arise—this is a recipe for disaster and failure.

The more systems you have in place for addressing potential issues, the better the chances the partnership will survive when disagreements arise, and the less chance there is for a meltdown between the personalities within the partnership.

What roles and responsibilities should be addressed?

How will properties be acquired?

While this question may seem to be quite basic, a lot of thought and discussion need to go into this aspect of the partnership. Questions such as who puts the deal together and who gets the loan or brings in the cash are essential, and need to not only be asked, but answered satisfactorily.

What criteria does the property need to meet in order to qualify for acquisition by the partnership? Criteria such as location, structure type (single family house, duplex, four-plex, etc.), the equity going into the deal, the expected cash flow, and more must be established upfront. That doesn’t mean the criteria must be set in stone. Build some flexibility in, but guidelines must be in place.

Who will manage the property?

Once a rental property is acquired, someone must manage it. You may want to employ the services of a management company; however, if you choose to self-manage, both partners must agree on who will be the property manager, and both partners should participate in developing the criteria for tenant qualification.

The following are just a sampling of the issues that need to be considered:

• Will tenant selection be done by the designated partner/manager, or will the selection process be done by committee?
• Will one partner be the contact person for the tenant or other party in the event that any issues arise?
• How will repairs be handled?

Who will do the bookkeeping?

I cannot over-emphasize the importance of competent recordkeeping. My recommendation is for the partnership to employ a third-party bookkeeper to do the books. If the partnership is so undercapitalized that a bookkeeper is not in the budget, perhaps the partnership should be reconsidered.
Still, if one of the partners wants to do the books, establish his or her experience with bookkeeping, and ask yourself some key questions:

• What is the individual’s background?
• How does this individual propose to do the books: manually or with accounting software?
• Does he or she have the time and self-discipline to do them properly?
• Are you willing to be held fully accountable for the job that he or she does?

The partners also need to predetermine when reports will be generated.
Will the profit and loss statements (P&Ls) be issued monthly or quarterly? Will there be reserves? If so, in what amount, and when is it acceptable to access the reserves? It is also a good idea to issue copies of the bank statements with the P&Ls. Transparency is a must!

What will the property/entity ratio be?
Do you want to create a separate entity for each property, or allow one entity to possess multiple properties? Each of these methods is legal, and is done regularly. The comfort and risk-tolerance levels of the partners will determine whether or not a single entity will be permitted to possess multiple properties and, if so, what the ratio of the two will be.

In a perfect world, one property/one entity would be the way things are done, but the reality, in my opinion, is that this is an unrealistic proposition, especially if you are planning to own several properties. Why? For two simple reasons: logistics and expense.

Each entity has to have its own bank account and tax return. If you have numerous properties and each is its own entity, you will end up maintaining numerous bank accounts.

One property/one entity is also a poor way to manage cash flow. Most commonly, you will at times have properties that are positive cash flow and properties that are negative cash flow. If each is its own entity, you end up coming out of pocket to fund the negative cash flow properties while the positive cash flow properties build good cash balances.

I can hear the asset-protection fans screaming, “Exposure!” at the idea of holding multiple properties under one entity, but is minimizing exposure not the reason for which we have liability policies on our properties and businesses? Is that not why we have mortgages and lines of credit? These encompass and protect our properties’ equity.

With the one-property/one-entity option, the banks make money, the accountants make money, and you bang your head against the wall while trying to juggle everything.

I have talked about just a few of the many subjects that need to be addressed by partners before committing to any shared-property ownership venture. Have no fear! Getting started is not as complicated as it sounds. The best way to start is for all partners to sit down and write what I call a “business plan lite.” Long before any properties are acquired, this document will address the questions of:

1. “Who?”
2. “What?”
3. “When?”
4. “Where?”
5. “Why?” and
6. “How?”

With this document in hand—and remember, it should be dynamic, not static, and should be used as a guideline—you can pioneer a partnership in which conflict and dangers are minimized from the start. When proper planning is utilized from the beginning, it is much easier to prevent the occurrence of costly situations down the line.