Partnerships and Joint Ventures

Joint Ventures, General Partnerships, and Limited Partnerships

All three of these are commonly used in real estate investing, so it worth devoting some time to pulling apart the various models and law applicable to each. We will start with joint ventures, since forming a joint venture is a request that real estate attorneys are routinely called upon to address.

Joint Ventures Based on a General Partnership

Joint ventures are a subset of partnerships. Many if not most joint ventures use, as their structural basis, a general partnership. This approach will be discussed first. However, it is also possible to form a joint venture based on limited partnership, and this model is addressed below.

A joint venture differs from a general partnership in its narrower scope and focus (usually investment in a single property venture), but is otherwise governed by the law of partnerships. Smith v. Deneve, 285 S.W.3d 904, 913 (Tex.App.—Dallas 2009, no pet.). A partnership or joint venture is a form of contract, whether written or oral. Texas courts have historically supported the concept of freedom of contract, allowing the parties to make agreements and allocate risks as they see fit, so long as some express statutory or common-law principles are not violated in the process. El Paso Field Servs., L,P. v. MasTec N. Am., Inc., 389 S.W.3d 802 (Tex. 2012).

In contrast to a joint venture, the typical general partnership is created for the long term for a broad range of business purposes. The partners may contemplate engaging in various enterprises with the intention that the partnership will endure from one transaction to the next into the indefinite future. Most joint ventures, by contrast, have a specific task or time frame. They perform that task, net profits are distributed, and they are done. One example would be investors pooling resources and efforts in order to buy, rehab, and re-sell either a specific residential house or a commercial project—a flip, in other words. Another example would be investors acquiring raw land to hold for a couple of years and then sell.

Law Applicable to General Partnerships

The law applicable to general partnerships is found in Business Organizations Code (“BOC”) Title 4. The BOC defines a general partnership is an association of two or more persons or entities (all of which assume unrestricted personal liability for partnership debts and activities) who intend to carry on a business for profit. Each partner has equal rights in the management and conduct of the business of a general partnership. In contrast with the common law, the BOC does not specifically require an intention to share profits or losses, although this is an important evidentiary factor in determining whether or not a partnership exists. Ingram v. Deere, 288 S.W.3d 886, 895-96 (Tex. 2009).

A “joint venture is governed by the same rules as a partnership.” Enterprise Prods. Partners, L.P. v. Energy Transfer Partners, L.P., 529 S.W.3d 531 (Tex.App.—Dallas 2017, pet. filed). “Generally a joint venture is governed by the [same] rules applicable to partnerships.” Smith v. Deneve, 285 S.W.3d 904, 913 (Tex.App.—Dallas 2009, no pet.).

The Entity Theory

Texas subscribes to the entity theory when it comes to general partnerships and joint ventures. Both are considered to be legal entities that may be sued and held liable for damages. A partnership is an entity distinct from its partners, and partnership property is not considered to be the individual property of the partners (BOC Sec. 152.056 and Sec. 152.101). A partner may use or possess partnership property only on behalf of the partnership. This ties in with the fiduciary duty of partners both to the partnership and to one another, specifically including a partner’s duty of loyalty (BOC Sec. 152.205) and duty of care (BOC Sec. 152.206). More on the partners’ fiduciary duty below.

“A joint venture is a distinct legal entity. This relationship is similar to a partnership, but the principal distinction is that a joint venture is usually limited to one particular enterprise. A joint venture must be based on an agreement, either express or implied.” Varosa Energy, Ltd. v. Tripplehorn, No. 01-12-00287-CV (Tex.App.—Houston [1st Dist.] 2014, no pet.). The agreement must provide for the sharing of both gains and losses. Arthur v. Grimmett, 319 S.W.3d 711 (Tex.App.—El Paso 2009, pet. denied). “A joint venture has four elements: (1) a community of interest in the venture; (2) an agreement to share profits; (3) an agreement to share losses; and (4) a mutual right of control or management of the enterprise.” Smith v. Deneve, id.

Even though a partnership is a distinct entity, each general partner nonetheless remains jointly and severally liable for all debts and obligations of the partnership. Personal liability is not automatic, however, at least not if the partnership alone is the object of a lawsuit. A judgment against a partnership as an entity must be accompanied by a judgment against the individual partners (named separately as defendants) in order to be enforceable against the partners’ individual non-partnership assets. American Star Energy and Minerals Corporation v. Stowers, 457 S.W.3d 427 (Tex. 2015). See also BOC Section 152.306, which requires that a judgment against a partnership must go unsatisfied for 90 days before a creditor may proceed against an individual partner and his assets.

Where is the firewall?

The most important contrast with an LLC is that neither a general partnership nor a joint venture based on a general partnership has a liability barrier—no firewall, which is a distinct disadvantage in a business as litigation-prone as real estate investing. When it comes to potential liability and protection of personal assets, there is little difference between a partnership format and simply owning assets in one’s individual name. For this reason, general partnerships and joint ventures should almost always be structured so that the partners themselves are LLCs or corporations.

Anytime an investor is considering a transactional structure, one of the first questions should be “Where is the firewall? Where is the liability barrier that is going to protect my personal assets?”

Written Versus Oral General Partnerships

A partnership agreement consists of “any agreement, written or oral, of the partners concerning a partnership” (BOC §151.001(5)). To the extent that a partnership agreement does not otherwise provide, the BOC governs. Deere v. Ingram, 198 S.W.3d 96,101 (Tex.App.—Dallas 2006). Fundamentally, partnership agreements are contracts between the partners, and the law applicable to the construction of contracts applies unless the BOC provides to the contrary. Sensible investors will insist on having a clear and comprehensive written partnership agreement that does not require the intervention of a court to interpret and apply it. Exxon Corp v. Breezevale Ltd., 82 S.W.3d 429, 443 (Tex.App.—Dallas 2002, pet. denied).

Although a general partnership agreement may be oral or written, it is certainly more prudent for real estate investors to reduce their agreement to writing. There’s an old saying about marriage that is equally applicable to partnerships: “Going in, it’s all about love. Coming out, it’s all about money.” So it’s best to have the exits clearly marked.

Unfortunately, joint ventures are often undertaken informally, without a written agreement, so doubt can arise as to whether, legally speaking, a partnership has been formed at all. BOC section152.052 sets forth rules for determining if a partnership has been created (the so-called “five factors” to which reference is frequently made in partnership cases):

(1) receipt or right to receive a share of profits of the business;

(2) expression of an intent to be partnership in the business;

(3) participation or right to participate in control of the business;

(4) agreement to share or sharing;

(A) losses of the business; or

(B) liability for claims by third parties against the business; and

(5) agreement to contribute money or contributing money or property to the business.

No one of the above factors is dispositive. They are also non-exclusive, meaning that not all factors need be demonstrated in any particular case. Just “one factor standing on its own can be strong enough to support the existence of a partnership”—even an oral general partnership. Black v. Redmond, 709 Fed. App. 766 (5th Cir. 2017). The existence or non-existence of a partnership thus depends on the totality of the circumstances.

BOC Section 152.051(b) provides that a partnership exists when two or more persons associate together for the purpose of carrying on a business for profit, regardless of whether or not they actually intended to create a partnership or use the term “partners.” All sorts of circumstantial information can be used to make this determination, even the bankruptcy schedules later filed by the parties after the business has failed. Palasota v. Doron, No. 10-16-00326-CV, 2018 WL 2054511 (Tex.App.—Waco May 2, 2018, no pet. h.).

A true legal partnership, however, must rise to a higher level than mere casual collaboration. A Houston appeals court decision describes a situation where a partnership was not found to exist: “The parties did not associate for the purpose of carrying on a single business in which they each held an ownership interest; instead, the four separate businesses agreed to work together for their mutual, but individually realized, benefit. Such coordinated business efforts do not, alone, create a partnership under Texas law. The parties did not share profits, losses, or liabilities.” Further, the court failed to find any evidence that the businesses in question ever actually intended to be partners in the legal sense—an important and essential element. Westside Wrecker Serv. v. Skafi, 361 S.W.3d 153, 173 (Tex.App.—Houston [1st Dist.] 2011, pet. denied).

Whether or not a partnership exists is the subject of much litigation. A plaintiff typically alleges the existence of a partnership in order to invoke the fiduciary duty responsibilities of a partner—or, more specifically, how the defendant “partner” in question may have violated that duty by misappropriating funds or assets.

The moral here is that one does not want to casually slide into an inadvertent partnership that could have unfortunate consequences in terms of liability. A partnership should be established deliberately and correctly with a comprehensive written partnership or joint venture agreement. One should not, for instance, casually refer to one’s business associates as “partners” (a much overused term) unless they are in fact partners in the legal sense. You may be creating an unintended partnership. Also, if an associate of yours falsely represents to others that a partnership exists, and those others reasonably rely on that representation to their detriment, then a partnership (known as a “partnership by estoppel”) may be created. Fleishman-Hillard, Inc. v. Oman, No. SA-11-CA-921-H, 2012 WL 13028770 (W.D. Tex. Nov. 21, 2012).

Based on the foregoing, it should be clear that the first step in creating a sound joint venture is to draft a clear written agreement. The second step is usually to convey the subject property into it. Avoid junk forms from the Internet.

A joint venture agreement dealing with real estate does not, by itself, represent an interest in property or act as a transfer of that property. For that, a deed is required as a necessary second step. Sewing v. Bowman, 371 S.W.3d 321 (Tex. App.—Houston [1st Dist.] 2012, pet. dism’d].

Minimal Contents of a Good Partnership Agreement

Certain core issues are key:

What are the respective percentage interests of the partners?

How will the partnership be managed? By majority vote? Will some issues require unanimous vote? Will there be a managing partner? What are the limits of his authority? What are the specific actions and duties required of each partner?

What about the investment property or project itself? Are there parameters for its rehabilitation and resale that need to be stated?

What will be the term (length) of the agreement? Presumably it will end when the project is finished and net proceeds are distributed, but this needs to be spelled out.

How will funds be handled? Who will sign checks? What about additional, future contributions if necessary?

Will there be loans as well as capital contributions by the partners? What about loans made by banks or hard money lenders? Promissory notes will need to be authorized and executed.

What about meetings of the partners? What constitutes a quorum? Who controls the agenda?

Suppose a partner wants to sell his interest or cash in? Suppose a partner dies? Will remaining partners have a right of first refusal to buy the decedent’s interest? On what terms?

What happens if a partner’s spouse files for divorce? Will remaining partners unwillingly wind up in business with the ex?

Every contract or agreement should have a default paragraph. What constitutes a default by a partner? If default occurs, what is the procedure for expelling a defaulting partner?

A good partnership agreement should address the issue of dispute resolution. Will mediation be required before one partner may sue another? That is usually good policy.

Finally, never underestimate the “miscellaneous” paragraph at the end of a contract. It deals with such issues as amending the agreement, which law applies and where venue will be located if a suit is filed, and so forth.

A complete partnership agreement will address all of these items and more, which is not to say that partnership agreements need to be unduly complex, long, or intimidating. Consult an attorney knowledgeable in the field in order to draft a partnership agreement and before signing one. Never use forms off the Internet for this purpose.

Good partnership agreements also include provisions by which they can be amended. Partnerships, like marriages, evolve over time and there should be an express mechanism in the partnership agreement that allows for amendments.

Fiduciary Duty of Partners and Joint Venturers

BOC Section 152.205 describes the general partners’ duty of loyalty to one another. Joint Venturers operating in the context of a general partnership are, to use the legal term, fiduciaries, which requires honest and honorable conduct with respect to both the partnership enterprise and the other partners. “As a fiduciary, a partner is under an obligation not to usurp opportunities for personal gain, and equity will hold a partner accountable to the partnership if he does so. . . . Thus, the [general] partnership relation imposes upon all partners an obligation of the utmost good faith, fairness and honesty in the dealings with each other with respect to matters pertaining to the partnership business.” In re. Leal, 360 B.R. 231, 235-6 (Bankr.S.D.Tex. 2007).

If the totality of circumstances supports it, courts will go to considerable lengths, first to find that a partnership exists where none was expressly stated, and then to find that one partner breached his fiduciary duty to the other, all resulting in an award of actual and exemplary damages plus attorney’s fees. Harun. v. Rachid, No. 05-16-00584-CV, 2018 WL 329292 (Tex.App.—Dallas Jan. 9, 2018, no pet. h.).

Different rules apply to partners in limited partnerships so long as the limited partner in question does not change hats and exercise operating control over the LP business, since that crosses a legal boundary that has multiple implications. No fiduciary duty exists in the case of a limited partner simply because he is a limited partner. Strebel v. Wimberly, 371 S.W.3d 267, 281 (Tex.App.—Houston [1st Dist.] 2012, pet. denied).

There is a four-year statute of limitations for breach of fiduciary duty actions contained in Chapter 16 of the Texas Civil Practice & Remedies Code.

Liability for the Actions of other General Partners

Pick your partners well. Supposedly, a general partnership (and the individual partners) are liable only for actions of a partner when those actions fall within the ordinary course of business of the partnership or are authorized by the partnership (BOC §152.303). So two things need to be considered here: first, the fact that real estate investing involves a truly broad range of activities, which means that almost anything done on or about an investment property, or even indirectly affecting the property, can conceivably be considered as within the partnership’s ordinary course of business; and second, trial courts (in their capacity as finders of fact) have significant flexibility in interpreting any given set of circumstances before them, a level of flexibility to which appeals courts tend to defer.

Take an admittedly extreme example: suppose your managing partner, unbeknownst to you and the other partners, opens a shady massage parlor on the premises. Are you liable for the consequences (at least the civil ones)? The answer is almost certainly yes, given that the actual use of the property is something that is definitely the business of the entity that owns it. This is another good reason to enter into partnerships, if at all, in the capacity of an entity that possesses a liability barrier, and not in your personal name.

In Texas, a plaintiff must first secure a judgment against the partnership before pursuing actions against the individual partners. American Star Energy and Minerals Corp. v. Stowers, 457 S.W. 3d 427 (Tex. 2015) referencing Bus. Orgs. Code §152.306.

Piercing the Veil of a Joint Venture Based on a General Partnership

How difficult is it to pierce the veil of a general partnership? The question is based on a misunderstanding of the law, since a general partnership or joint venture has no veil to pierce. Shoop v. Devon Energy Prod. Co., L.P., No. 3:10-cv-00650-P, 2013 WL 12251353 (N.D. Tex. Mar. 29, 2013). Piercing and alter-ego-type allegations are “inapplicable with regard to a partnership because there is no veil that needs piercing. . . . Pinebrook Props., Ltd. v. Brookhaven Lake Prop. Owners Ass’n, 77 S.W.3d 487, 500 (Tex.App.—Texarkana 2002, pet. denied). The partners in a general partnership or joint venture are potentially jointly and severally liable for all of it, which reiterates the importance of engaging in a partnership only in the capacity of an LLC or corporation.

Veil-piercing in the case of limited partners is a slightly different case, but is generally rejected in Texas because a “person doing business with [a limited partnership] always has recourse against any general partner. . . .” Peterson Grp. v. PLTQ Lotus Grp., 417 S.W.3d 46, 56-57 (Tex.App.—Houston [1st Dist.] 2013, pet. denied).

The presence of fraud or misrepresentation can affect the outcome of any court case, but especially ones involving piercing. As is true with LLCs, do not rely on a limited partnership to limit your liability if you utilize the entity to commit actual fraud. “As a general matter, a limited partnership is an entity separate and distinct from its partners, with separate, distinct liabilities and obligations. Nevertheless, Texas law allows the separateness of the entity to be ignored if the limited partnership is used as a straw man for the purposes of obtaining an impermissible result [such as actual fraud] under Texas law. . . .” In re Sewell, 413 B.R. 562, 571-72 (Bankr.E.D.Tex. 2009).That being said, “limited partners are generally not responsible for the limited partnership’s obligations unless they take some action to accept or subject themselves to such liability”—such as interfering with management or control of the business. Peterson Grp. V. PLTQ Lotus Grp., 417 S.W.3d 46, 56-57 (Tex.App.—Houston [1st Dist.] 2013, pet. denied).

Tenant-in-Common Arrangements

TICs are often written up as general partnerships but are nonetheless focused on a specific deal, often a larger project such as an apartment complex or a strip center. Promoters seek out investors, usually affluent novices, who are packaged together in their personal capacities. In other words, these newbie investors do not form an LLC or corporation to act on their behalf in the deal; they sign the TIC agreement individually and then often go on to personally guarantee a seven or eight-figure note to a bank. If the value of the investment (often inflated to begin with in order to provide up-front fees for the promoters) declines, the results are usually unfortunate for the investors. The promoters—who have since taken their profits and moved on to other schemes—are the winners.

Real estate lawyers are accustomed to counseling TIC investors who have awakened to find that a lender suddenly seeks to hold them individually liable for a very large sum. Few consulted an attorney before signing up with the TIC. Many are otherwise smart and successful professionals who should have known better.

Joint Ventures Based on a Limited Partnership

The above discussion has focused on joint ventures that use as their basis a general partnership. It is, however, also possible to base a joint venture on a limited partnership. LPs are governed by BOC Title 4, Chapter 153, but also Chapters 151, 153 and 154 and Title 1, to the extent applicable.

There are certain critical differences between general and limited partnerships. Firstly, a limited partnership is a registered entity, meaning that, like a corporation or an LLC, it must pay fees to file a certificate of formation which becomes public record. (Accordingly, there is no such thing as an oral limited partnership.) An LP is also subject to annual reporting and fees. A general partnership is burdened by none of this and has the ability to operate privately.

Secondly, different operational rules apply. In a general partnership, all partners may take part in the enterprise, and all partners have full, unrestricted liability. In a limited partnership, only the general partner may engage in management. In exchange for giving up control, the limited partners are held liable only to the extent of their respective contributions to the LP. The general partner is the only member to assume unrestricted liability. For this reason, the general partner is usually a corporation or LLC with minimal assets established specifically for the purpose of managing the LP and nothing else. The general partner is typically is a 1% owner. Since management is the sole province of the general partner, LP agreements tend to be heavy in their emphasis on the powers and duties of the general partner.

The limited partners may be any sort of entity, including another limited partnership. But they should definitely be entities, not individuals. Only amateurs participate in a joint venture, regardless of how it is structured, in their individual, personal capacities.

Limited partnership tend to be more common in commercial transactions, but their usefulness in other investment arenas should not be overlooked. In the most basic form of a limited partnership (two partners), the general partner owns a 1% interest and a limited partner owns a 99% interest. There may of course be more partners with different percentages of ownership. If there is more than one general partner (and this is allowed), then one of them should be designated the managing partner.

An LP is an excellent way to bring in a passive “money partner” who is cautious about incurring liability beyond the amount invested.

Doctor Deals

These are generally a multi-layered combination of LLCs and at least one limited partnership. They are designed by their promoters to offer affluent professionals a passive investment that also protects the investors from personal liability.

Certain elements are common: a real estate project is usually at the core—examples are a hospital or surgery center, an apartment complex, a shopping center, or a development of townhomes. The property or project is either not yet under contract, or it may be (sort of) under contract, but with a variety of exits available if necessary up-front capital is not raised.

Well-documented presentations by the promoters will include not only slick multi-media, but an optimistic pro forma projecting earnings, a copy of the property purchase contract, a survey, an appraisal, and a title commitment. Also available will be legal documents relating to the purchase of units in an already-formed entity such as an LLC. It is this LLC that the passive investors will be investing in. They are usually asked to sign a subscription agreement that commits them to purchase a portion of the LLC membership that has been blocked off for passive investors.

All of these documents need to be scrutinized closely. A frequent commonality is that the portion of the LLC or other entity that has been dedicated to outside investors is a minority interest (say, 40% of available units) while the remaining 60% of units are owned (indirectly) by the promoters. The key point here is that the passive investors will always be minority owners with no voice or control.

Also, the promoters’ ownership in this entity will be indirect, meaning they will not own any units of the LLC in their personal names (an additional shield against individual liability). Instead, they will likely have formed a different entity (perhaps another LLC) to own these units. The total interest owned by the promoters’ personal LLC will thus be, per this example, 60%. Accordingly, the entity owned and controlled by the promoters will be the majority stakeholder in the LLC in which the passive investors are being asked to invest (let’s call it the “Doctor LLC”).

The layers continue. The Doctor LLC, it turns out, will not own the property or project directly. There will be at least one other entity, perhaps two, in the chain before one reaches the company actually owning title to the real estate and the improvements on it. In other words, the passive investors are not investing in a real estate project; they are investing in an entity that will have only an indirect interest. This is not a real estate investment, at least on the part of the doctors being asked to personally invest, no matter how it is pitched by the promoters. It is a financial investment.

The good news for the passive investors is that they are well-sheltered from personal liability relating to the project’s operations, particularly if they form their own individual LLCs as vehicles for their participation. The bad news is that they are at the bottom of the food chain when it comes to any distributions or returns. A careful examination of the documents will usually reveal that the promoters not only control the amount and timing of distributions (if any), they also have the right to pay themselves first—not only when it comes to distributions but also as to various salaries, commissions, fees, and other forms of compensation available only to them.

Worse, the company agreement of the Doctor LLC will likely provide for arbitrary cash calls, so a doctor investing $100,000 cannot be assured that that amount will be the total commitment. If, the project requires more cash, either for the initial acquisition or for operations—and they often do—the doctor investors may be called upon to write one or more additional checks. If they do not, the penalty is may be a forced dilution of their respective interests; but it could be more severe, even taking the form of actual expulsion from the Doctor LLC.

In all of this it is certain that the promoters will have bullet-proofed themselves against liability, whether arising from the project or from the passive investors. The legal documents will conspicuously lack affirmative representations or warranties; in fact, such representations and warranties will be extensively and repeatedly disclaimed throughout. If the project fails to generate a positive return for the doctors, they will have no meaningful legal recourse against any person or entity involved. The LLC in which they invested will be an insolvent dead end. The promoters will be unreachable.

What do the promoters contribute? Not cash. Their contribution is the elaborate legal structure and the prospective purchase of an asset that may or may not be fully under signed contract. There are start-up costs associated with all of this, of course, but these are soft costs easily written off. And, going forward, the promoters get the most substantial benefit of all: they get paid first. Really large projects organized along these lines, even if they “fail,” can still make the promoters rich.

Occasionally, the doctors may even make a little money.

Investments: The Real Estate Product and the Legal Product

When tempted to participate in any venture of substance, an investor should inquire into at least two things: first, the economic nature of the investment itself—basic due diligence, in other words. What is the investment product being sold? Are the fundamentals underlying the real estate, the management of the project, and the anticipated ROI solid? This inquiry is essential, of course, and most everyone knows to do this. Unfortunately, that’s where many investors will stop . . . and in doing so they miss an essential second question: What is the legal product associated with this investment?

There are a couple of parts to the question regarding the legal product. Firstly, what specific documents are involved and are they of first-class quality from the perspective of legal draftsmanship? Are they serious legal work or a lot of random contract clauses amateurishly cobbled together from the Internet? A review of the prospectus is entirely insufficient here. One should dig deeper and insist on seeing, well in advance, all documents that the investor will be asked to sign.

The second part of the “legal product” inquiry is this: What reputable lawyer or law firm drafted the documents? Do these attorneys actively and openly stand behind the project (at least in a legal sense), or is the law firm’s name nowhere to be found? Is the promoter’s attorney available for the investor’s attorney to call and ask questions? The visibility (the presence or absence) of a quality attorney standing behind a project and its promoter can be quite telling and, as much as anything else, can provide an indication as to the legitimacy and trustworthiness of both. Good lawyers and law firms, in order to protect their liability, tend to look into such clients before allowing the firm’s name to be used in association with the project. The absence of this should be a red flag if not an outright disqualifier.

This firm routinely receives requests that we “look over” proposed documents for an investment. Often these consist only of a prospectus, or perhaps a marketing plan with impressive graphs and tables, without any substantive underlying legal documents that the client would be expected to sign. There may be no mention of the law firm that prepared these documents or is standing behind the promoter. In such situations, caution is in order for both the investor and the investor’s attorney.

Intelligent Structuring

No contract or transaction should ever be entered into without a consideration of asset protection ramifications if the deal fails. It is often the attorney who must counsel a starry-eyed, in-a-rush client that a proposed transaction could fail as well as succeed. In the event of failure, what is the exit strategy? Which of the client’s assets will be exposed and how can that exposure be limited?

Lawyers can often see disaster looming, not because they are prescient but because they have seen this film before. In certain cases, when a happily oblivious client is determined to self-destruct, a lawyer may find it necessary to decline the representation.

Intelligent structuring implies an awareness not only of the mechanics of a proposed transaction but also of potential outcomes and their consequences. A willingness to look down the road, so to speak, where it may fork one way or another. Clients are sometimes astonishingly reluctant to this, accusing the attorney of trying to “kill the deal”—an unjust charge in most cases. An attorney’s job is to make the deal work, ideally in the client’s best interest, which brings us back to structuring issues.

Knowledgeable investors will have an entity, a management company, that (acting through an assumed name) is utilized for business with tenants, vendors, contractors, brokers, and other persons who might one day file a lawsuit. The management company is substantially a shell that contains employees, rental furniture, leased vehicles, and minimal cash. It is an equity-free dead-end for creditors. Hard assets reside in a separate holding company that does business with no one. The public should not even know that the holding company exists. In any case, prudent investors avoid signing contracts, leases, and the like in their personal name. All decisions that may have liability implications are made with an eye toward asset protection.

In the context of a partnership, it is therefore preferable for the investor to choose an existing entity (or perhaps form a new entity) in order to participate in the deal, making the enterprise a partnership of entities. This provides the best protection. And when it comes to personal signatures and guarantees, the solution is often to just say no.

Transactions with Family and Friends

Why not collaborate with friends and family members? They know you best, after all. Caution, however, is advised. All lawyers can tell stories of clients who propose doing a transaction with a brother-in-law, or perhaps borrowing money from parents, and declare that no partnership agreement is necessary because the other party is family or a close friend. In fact, the reverse is true. In transactions involving family and friends it is more important to reduce the agreement to a signed writing, not less so. Anyone who has witnessed the agony of intra-family litigation knows this to be true.

DISCLAIMER

Information in this article is provided for general informational and educational purposes only and is not offered as legal advice upon which anyone may rely. The law changes. Legal counsel relating to your individual needs and circumstances is advisable before taking any action that has legal consequences. Consult your tax advisor as well. This firm does not represent you unless and until it is expressly retained in writing to do so.

Copyright © 2020 by David J. Willis. All rights reserved worldwide. David J. Willis is board certified in both residential and commercial real estate law by the Texas Board of Legal Specialization. More information is available at his website, www.LoneStarLandLaw.com.