Working with one or more partners on a real estate deal is frequently a wise decision, if not a necessity. For beginning investors, taking a partner helps offset the risk of even a small investment. More experienced real estate investors may want to take on partners for the same reason, since as the deals get bigger, the risk becomes greater. Furthermore, individual investors can often benefit from the wisdom, experience, and diverse perspectives that partners can bring to the table.

But of course, there are pitfalls to the concept of partnership. Many friendships and even familial relations are ruined due to misunderstanding, negligence, incompetence, or just plain bad luck associated with doing business - not to mention the financial impact of partnerships gone wrong. To avoid these dire consequences, you should always have a formal partnership agreement drafted by an attorney, and you should always establish your partnership as an official, legal business entity.

A vastly superior business entity, easily the most popular, is the corporation. By incorporating, you and your partners establish a legally distinct business entity with its own equivalent of a social security number (called an EIN, or "employer identification number"). In fact, a corporation is technically considered a "fictitious person." Thus, unlike a general partnership, a corporation is legally separate from any and all "partners" - or to be more accurate, "shareholders."

There are many advantages to incorporating. Chiefly among them, corporations provide limited liability. Since they are legally distinct, shareholders cannot be held accountable for the actions of the corporation. In other words, if a corporation of which you're a shareholder is sued, your personal assets are safe. Think about it - if you own stock in Wal-Mart, can you lose your house if the company is sued? Of course not. Your losses are limited to your investment. There are some cases in which a shareholder can be held liable in a small corporation, but in many cases you will be protected from liabilities of the business, and, more important, the misdeeds of your business partners and employees.

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