Did you start off as an LLC?

[missvickie75]

I'm getting conflicting views on this issue. Some REI started out just by themselves and did a few deals to make enough money to set up an LLC. Some REI didn't do anything before setting up an LLC. It can be over 500.00 to set up an LLC and I wanted to know what the experience of people on this board has been.


Thanks,
Vickie

[Dave T]

I started out investing in my own name. 

For most new investors, forming the LLC first is a waste of time and money.  If you have money to spend, spend it on building your investing business, then worry about an LLC when you have a few million dollars worth of assets to protect.

[BLL]

I agree with Dave. An LLC only makes sense for a newbie if you have active partners or substantial wealth outside of the RE business. Always remember that your personal assets are always at risk if you actively participate in the business, whether you use an LLC or not. There is no limited liability for a judgment against you personally.

[Bluemoon06]

Financing terms are much better for an individual than an LLC.  Your situation will dictate when an LLC or partnership or whatever is required.  For example you will find a need to do a deal with another person and the deal will need to be structured.  The lawyer will suggest the proper vehicle for the deal.  An LLC for LLC’s sake is thrown away money.  I did do my first LLC until I had been doing real estate over 6 years and earnestly 2 years.

[Kelly luvs Bandit Signs]

Hi,

I did several deals first, then I met with an EA (enrolled agent)
that suggested I incorporate.  It's not neccesary to do so to
claim deductions but it's relatively cheap and fast to set up.

After a couple of years doing this I switched to a CPA to get better
advice and to help with tax planning.

Not getting incorporated is like not having the right insurance;
you can do deals without it, but when you need it, it's nice to have.

[Thoward]

Pretty much agree with Kelly on this one. I organized my LLC on the first deal. It was something I planned on using in the future so I used the old ideal "better to have and not need it then need and not have it". Although you'll find instututions that won't lend to the LLC directly (my problem now) initially its better to have it for when you want them then have to rush to put it together later. I put mine together for 1500 (through an attorney and I'm not happy about it) and got all documentation and paperwork done by them. I actually was putting my first real deal together while they were organizing that so it worked out perfectly.

As a word of advice, don't let an attorney tell you it costs thousands to do (actually less then $400 solely) but if you find someone that gives you a great price you can afford early on take it. As an example, I'm getting ready to close on a property that's a halfway house but pulls in a positive cash flow of $400 per month given owner financing. I don't want this liability in my name so an LLC is perfect. If I needed to put it together last minute it would be a HUGE hassle against trying to close.  Definetly something to think about.....

[BLL]

A big consideration is changing LLC law. Make sure whatever service you use provides you with updates. A recent ruling in FL made LLC limited liability uncertain and nothing prevents judges in other states from using this ruling as a guide. Competent attorneys have been notifying their clients of changes that must be made to operating agreements. To my knowledge the free forms available online haven't taken this into account. This isn't a DIY activity unless you plan to subscribe to legal feeds to keep up to date and now how to make the changes appropriately.

Another consideration is defending the LLC. If it gets sued, you can't represent the LLC and must hire an attorney. You will spend 5-10K while this attorney reviews your LLC to become familiar with your situation and hopefully that retainer is enough to carry you through discover and trial.

I don't agree getting incorporated is like not having the right insurance. It's more like a parachute. You don't know it works until you use it, but you are dead if it fails. Think in these terms when deciding cost versus benefits and avoid anyone whose interaction with you is a form you fill out. You want face time or at a least few phone calls to determine what is right for you. An LLC is part of entire plan, not something used in isolation.

[andydallas]

if your starting out remember that your business organization (LLC, etc) is your last "line of defense" not your first.

The right management style and having the right liability insurance in force are your first and second.

Have enough liability insurance in force so that the insurance company had rather spend a few hundred thousand dollars defending you in court instead of "rollling over" if someone sues for a large amount

andy

[tingle]

I started out investing in my own name and once I had multiple properties, I started forming either an LLC or an S-Corp. Today, I do not hold any properties in my personal name. I know many investors that form multiple LLCs and some even form an LLC for each property (ex...123 Main Street, LLC). You can encounter new rules with financng and even insurance when you hold title in a company but all of these can be overcome. There are companies online that can assist you with the process of forming your LLC and you will find their rates may be lower than hiring a local attorney. Remember, one of the benefits of holding title in the LLC instead of your name is the additional "layer" of protection if there is ever a problem. I agree with some of the other posts, holding title in an LLC should be just part of your plan.

[BLL]

There are companies online that can assist you with the process of forming your LLC and you will find their rates may be lower than hiring a local attorney. Remember, one of the benefits of holding title in the LLC instead of your name is the additional "layer" of protection if there is ever a problem.

Have these services ever contacted regarding recent changes in LLC law? They may be cheaper than an attorney, but is it really cheaper if the documents they provided are out of date and don't work?

How is the LLC protecting people who are running the business themselves? That personal liability isn't covered by the limited liability shield of the LLC and charging orders get passed to the other LLCs owned by the investor.

[MartinCPA]

BLL,

What new LLCs laws are you referring to, the Florida SMLLC case?

also I am confused by the personal liability statement.  Yes, if you personally guarantee the liability, you are responsible for that liability.  I have clients who hold real estate in LLCs but there is always one member who personally guarantees the loan. 

[BLL]

What new LLCs laws are you referring to, the Florida SMLLC case?

The case is Olmstead v. FTC. Anyone who has a FL SMLLC should have a gotten a letter from the person/firm who set up the LLC regarding the effects of this case and make the changes to maintain the protection. That is my problem with free forms and low cost providers. There is no follow up. I haven't found anyone who used an online service to set up an LLC get any type of notice regarding this case. IMO any amount spent for a FL SMLLC without good follow up was just a waste of time and money. A FL SMLLC is basically worthless now when it comes to liability and the court even implied that multi-member LLCs are also at risk.

I compare an LLC to a house. A house is not effective unless it is well maintained. An LLC is the same way. It needs maintenance and constant vigilance to keep it working at peak performance. It is not something to put on the shelf and forget. That is just a waste of money and a false sense of security.

also I am confused by the personal liability statement.  Yes, if you personally guarantee the liability, you are responsible for that liability.  I have clients who hold real estate in LLCs but there is always one member who personally guarantees the loan. 

I am not talking about personal guarantees. I am talking about personal actions that cause an injury, like a car accident where you are at fault, or a deck you built improperly collapses when people are on it, or you fail to properly supervise your workers. You are personally liable for any damages caused by your negligence. It doesn't matter if the property is held in an LLC or you are acting on behalf of someone else. You are always personally responsible for your personal actions that cause injury. Owning property in an LLC doesn't absolve you of this responsibility. It just makes the LLC responsible in addition to yourself. Investors who actively manage rentals or perform rehab work have no limited liability with their LLC when their personal actions cause an injury.

[MartinCPA]

The case is Olmstead v. FTC. Anyone who has a FL SMLLC should have a gotten a letter from the person/firm who set up the LLC regarding the effects of this case and make the changes to maintain the protection. That is my problem with free forms and low cost providers. There is no follow up. I haven't found anyone who used an online service to set up an LLC get any type of notice regarding this case. IMO any amount spent for a FL SMLLC without good follow up was just a waste of time and money. A FL SMLLC is basically worthless now when it comes to liability and the court even implied that multi-member LLCs are also at risk.

I compare an LLC to a house. A house is not effective unless it is well maintained. An LLC is the same way. It needs maintenance and constant vigilance to keep it working at peak performance. It is not something to put on the shelf and forget. That is just a waste of money and a false sense of securit

OK, I agree with your house example. The problem with LLCs is they are relatively new and haven't been tested every where.  However, no structure is fool proof.  I believe a LLC provides adequate asset protection.  I have years of experience in NY real estate (commercial) and  LLCs have been solid. We have addressed the potential SMLLC problem by converting the SMLLCs to MMLLCs by transfering 1% of the LLC interest to an another entity.  Nevertheless, the dozens of accountants and lawyers I interact with everyday still recommend LLCs. 

I admit, I don't have experience with residential real estate (not including larger apartment complexes) so I am trying to make sense of what you are saying to bear with me.  Are you Anti-LLC or you don't believe they are necessary for the newbie or small-in-scale real estate investor?

I am not talking about personal guarantees. I am talking about personal actions that cause an injury, like a car accident where you are at fault, or a deck you built improperly collapses when people are on it, or you fail to properly supervise your workers. You are personally liable for any damages caused by your negligence. It doesn't matter if the property is held in an LLC or you are acting on behalf of someone else. You are always personally responsible for your personal actions that cause injury. Owning property in an LLC doesn't absolve you of this responsibility. It just makes the LLC responsible in addition to yourself. Investors who actively manage rentals or perform rehab work have no limited liability with their LLC when their personal actions cause an injury.

But isn't this the case for any business structure (piercing the corporate veil)?

Thanks!

[MartinCPA]

I know many investors that form multiple LLCs and some even form an LLC for each property (ex...123 Main Street, LLC).

Yes, Tingle is correct.  If you are going to put your properties in a LLC, you should set up a LLC for each property. Then set up a S-corp as the management company to manage each property.

[justin0419]

I know many investors that form multiple LLCs and some even form an LLC for each property (ex...123 Main Street, LLC).

Yes, Tingle is correct.  If you are going to put your properties in a LLC, you should set up a LLC for each property. Then set up a S-corp as the management company to manage each property.

My gosh.  The paperwork nightmare.  Seperate bank accounts for each LLC.  I'll keep my liability insurance maxxed out and keep my LLC rather than creating a ton more of them.