Q: I am planning to buy a rental property with a business partner, and have heard that forming an LLC to hold the real estate might be beneficial. What are some things I should consider?
A: Forming a limited liability company (LLC) to acquire and hold rental real estate with a business partner is a common and often prudent decision. The following are some of the key matters to consider:
Liability Protection
The limited liability structure of an LLC helps to protect your
personal assets from the liabilities of the business. If, for
example, a tenant is injured on the premises, the tenant's
cause of action will be against the LLC – not you or your
partner individually. This creates a legal shield, so long as the
LLC is properly formed and certain corporate formalities are
followed.
Ownership Structure
Before buying the property, determine how ownership will be
divided. Will each member contribute an equal share of capital, or
will one partner contribute more money while the other contributes
"sweat equity" by managing the property? Your operating
agreement should clearly spell out each partner's ownership
percentage and the basis for it – this reduces ambiguity and
avoids future disputes.
Governance and Voting Rights
Decide how decisions will be made. In a 50/50 ownership situation,
what happens when partners disagree? Your operating agreement
should define voting rights and outline how to resolve deadlocks
– such as bringing in a neutral third-party mediator or
agreeing in advance to a buy-sell clause if consensus cannot be
reached.
Tax Considerations
By default, a two-member LLC is taxed as a partnership, with income
and losses passing through to the members. This can offer
flexibility and potential tax advantages, but every situation is
different. Best practice is to consult a tax advisor to confirm
whether this default tax election is most beneficial for your
particular circumstances.
Transfer Restrictions
Consider what happens if one partner wants to withdraw, gets
divorced, or passes away. Your operating agreement should include
transfer restrictions, such as rights of first refusal or mandatory
buyout provisions. Without these, you could unexpectedly find
yourself in business with your partner's ex-spouse, heir, or an
outside investor you never agreed to work with.
Bottom Line
Using an LLC to hold rental property with a partner can offer
significant benefits, but careful planning with qualified legal and
tax professionals is key.
Published: Union Leader
September 20, 2025
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
