Partnerships: Beware!

I can remember back years ago when I was getting started in real estate with my first business partner and long time friend. We heard the warnings. We read all the horror stories of partnerships gone bad. And then… we decided that we were different and our situation was “different”!

You see, we’d been friends for years before, had started several different businesses together and had lived and worked closely for the past 5 years. So all those bad things that happen to other partnerships surely wouldn’t happen to us.

Plus, we were going to make sure we did things right! We were going to set up a business entity. After going back and forth from attorney to CPA; LLC to S corp, we eventually settled on the S Corp. It was cheaper and since we couldn’t find any conclusive reason not to, we dove in and were now 50/50 partners in our own business.

A few years later after our adventure began, we found ourselves in litigation and in an ugly battle! So, why did things take such a turn for the worse?

It’s simple actually… We ordered our corporation online for about $100. We split everything down the middle and hoped for the best. We didn’t take into account a budget… We didn’t take into account conflict… We didn’t take into account strengths and weaknesses… We didn’t take into account how the other person handled money and what their expenses were… We didn’t take into account any measures of checks and balances… (I could go on and on and on here, but I won’t bore you with the details).

The long and the short of it was that we didn’t know what we didn’t know. We had the best of intentions early on, but shortly thereafter, we weren’t making money hand over fist, the personal bills were piling up and stress came into play. Plus, we had both grown in different directions and had no contingency plan in place when things inevitably changes.

After 2 ½ years back and forth with mediocre attorneys and several thousand dollars, there was still no resolution. My former partner moved away and never signed the final documents. I could go into bitter detail regarding all of the individual back and forth that went on, but ultimately the resolution was to administratively dissolve the corporation and I had to personally pay back any debts on loans because it’s the right thing to do even though the corporation was no longer solvent.

While that partnership was dissolving, I met another individual who wanted to go into “partnership”. Having learned from my recent mistakes, I was hesitant and much more careful. This time, I was going to use a “JV”, or joint venture, agreement rather than form an all out partnership via a corporation. I thought I was being much more careful.

Guess what? It backfired! All I had done was basically duplicate the very same thing I had done the first time with a different person and with a different scope. This time it was for only a single property. But, what I didn’t realize was that it could spiral out of control.

The joint venture agreement made both of us equal partners and equal decision makers. At first, it seemed okay and it was to be only a short term project: one deal to be precise. But, shortly thereafter the deal started heading south. The contractor wasn’t doing his job. I wanted to fire him. The partner didn’t. Since the property was financed under his name, I lost that battle.

I was forced to pay for things to which I didn’t agree. The property was then cited with code violations and the project spiraled out of control. It was costing $8000 total with no end in site. I had two choices: (1) Lawsuit, (2) Continue paying indefinitely on a project on which I had no control.

I chose option 1. I can’t get into all the details, but I can tell you that while sitting across from my attorney going over the case and what our options were and how it was going to play out, one thing became very clear.


As you know, I’m an information junkie myself and buy all the homestudy courses I can get my hands on and attend my share of seminars and workshops. I believe that we can learn something from everything. But there is a flaw… and that’s that we tend to think that we can follow generic advice in a training program and that we’re covered.

When in comes to legal and tax advice, forming entities and structuring partnerships; just about anything that involves finances and legal issues, hire a professional. Nine out of ten times it will save you money in the long run. The few hundred dollars it may cost you to have an attorney point out potential pitfalls, highlight some areas of concern, or plain out object to things is worth it. In the long run, the savings can amount to tens of thousands of dollars or more.

Here are a few instances in which you should consult a professional:

1. Setting up a legal business entity. Consult an attorney and a CPA. Ask for referrals and ask them to give you the pros and the cons of each. If you’re getting into business with someone else, ask an attorney to help with all the out clauses, operating agreement, etc. Don’t be afraid to play the “what if” game. Plan for divorce while you’re on the honeymoon! Be cautious of the $99 online corporations unless you know what you’re doing…

2. Joint ventures or Partnerships. Go over your agreement together and iron out the details. Then, EACH seek out the advice of an attorney and CPA BEFORE signing on the dotted line. This way, you each have your own representation and can feel that your best interests are represented. This goes for any project that you do with someone else.

3. Setting up an entity for tax purposes. Again, there are lots of different opinions on the best entity for tax purposes and things are going to differ based on your personal situation. Without speaking to a professional, you could wind up doing more harm than good!

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