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Active Partnerships and Passive Partnerships

With Percy Nikora, Co-Founder

 

So, let's say that you've found a property with a few of your friends and you all want to invest in that property, you're all playing a role in that property and you're playing an active role where each, let's say, each person in that partnership is almost as an equal voice, so to speak. Then that will be called an active partnership. You know, that works well if there's three, maybe four people. And when you start going beyond that, you know, it's a little hard to manage and make decisions by consensus. So that's when you start moving more towards another type of structure, which is more of a general partner, limited partner structure.

So a passive partnership is one where there is a limited partner who is pretty much making the investment, staying informed, but not making the day-to-day decisions. And the day-to-day decisions are made by the general partner, who is the more active partner, or could be the manager of the LLC. And the passive partner is getting the gains from a tax standpoint, is treated as a passive investment. So they will get passive gains as well as passive losses from that particular investment.

So there's, and by a passive investment, there's two things that make it passive. One. There is limited liability. So from an LLC standpoint, you know, if you are in an active partnership and something happens with that entity and you get sued, you are equally liable for that particular, whatever that case may be. In a structure where you are a limited partner and you have very clearly defined roles which are more of a passive role, then you do get some additional legal protection because the sponsor or the more active partner is the one who is more legally responsible for the day-to-day activity of that entity. So there's some additional legal protection you get. Plus, from a tax standpoint, it's treated as passive income. So just like you would be investing in any stocks, et cetera, that would all be treated in a similar fashion.

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