Types of Partnerships and Group Ventures
Partnerships, Per The IRS
Property-Specific Joint Ventures Agreements
Partnerships, Per the IRS
The IRS views three different types of business structures as ongoing business entities:
- Sole proprietorships
Let’s not confuse those types of ongoing business entities with the joint venture partnership which you'll be building through a contractual agreement. Well, you might ask, how does the joint venture differ from an established legal partnership?
A legally registered business partnership is set up as a permanent entity. It has a number of advantages, including usually lower startup costs than a corporation, somewhat more flexibility in tax treatment, a lot of familiarity by CPA’s with this type of business form, and it permits flexible treatment of contribution and withdrawal of capital from the partnership.
However, there are disadvantages. One partner is liable for all of the other partner’s actions done in the name of the partnership. In addition, each partner is tied to the other’s tax returns. Think about all those limited partnership arrangements which bought real estate tax shelters in a big way. A problem for one became a problem for all. If the partnership goes sour then everybody in the partnership is liable for audit. As a limited partner, you have no influence over the general partner except as a coalition or group. There may be a disagreement on how to spend the partnership money. Now, you and someone else could set up a partnership as an ongoing business entity, recognized by the IRS, whose business purpose it was to buy and sell a number of houses, or buy and manage apartment buildings. But this is not the kind of venture partnership I'm taking about which is more appropriate to individualized small investments.
What about syndications? How is that related to joint ventures? Carleton Sheets has developed materials on Real Estate Partnerships, about joint venture syndication for group investing. The premise is that by operating as a group, you can accomplish what you can't do individually. You may be wondering, well what about securities laws, and syndications? In 1946, the Supreme Court dealt with the issue of investments by their ruling in the Homey case, which involved selling of orange groves in Florida to tourists. You probably have an idea of what some of those issues were.
The Supreme Court ruled that an investment contract exists where there are three basic conditions:
1. That money is invested in a common interest,
2. There is an expectation of profits,
3. The profits will occur as a result of an effort by a third party.
As a result of the ruling, registration of securities and securities licensing became part of the law. However, there are exemptions available to you as an investor. If you don't do more than one or two partnerships a year, such as for big apartment complexes, and you make sure the property and purchasers are in the same state, and there are 15 or fewer partners, and you have fully disclosed the risks as well as the rewards, then you are exempt from violations of the federal securities law. So much for syndications, really quite different from joint venture investing.
Types of Partnerships and Joint Ventures - Chapter D (continued)