Wow! Another great idea from my colleague Frederick Schubert. I am so excited to be working with so many smart CPAs. If you want to find out how you can work with a DKAffiliated CPA, please Contact Us.
Frederick’s idea has to do with how to handle an Operating Agreement for members who come in with different talents. Say, one guy puts up the money and another puts up the work.
In many cases, the first year of a real estate venture produces a loss. In fact, many real estate deals produce tax losses for years, even when there is cash flowing out.
So, who gets the loss? Well, on the surface you might think if you have a 50/50 deal where one guys puts up the cash and the other guy puts in the time that the loss should split 50/50. But, if you do that, you’ve lost a big opportunity.
You see, in order to take a loss, a partner (or member in case of an LLC) must have basis. So, the guy who put up the cash has basis in the amount of the cash. The guy who put in the time and nothing else has no basis. If you split the loss 50/50, the guy who puts in the time gets no benefit.
A simple provision that says that loss should be split in relationship to the basis would solve everything. Put this on the list of things to talk over with your entity formation specialist!