BiggerPockets

You can absolutely run a real estate investing business as a sole proprietorship. In that case, no real " set up" is necessary.

However, you'd face some massive personal liability issues if you did that.

Forming a corporation or a limited liability company would probably be the first step to protect your assets from your business' liabilities. Forming a corp or LLC is surprisingly easy. Visit your state's Secretary of State website for forms and instructions, and for the requirements for each business entity.

Here in Texas, all you have to do is fill out a form and pay $300 and you've got an LLC. I believe the story is very similar in most states.

After doing that, you'll want to consult with a lawyer to draw up an Operating Agreement and learn more about how to properly separate your finances from your business' finances to maintain the protection that an LLC or Corp would give you.

An LLC provides no tax benefits; the profit/loss of the LLC " flows through" to your personal income tax.

The LLC's financials are as private as your personal financials.

Here's the reason for forming an LLC: Let's say you own five properties, each worth $200K, in addition to $200K of personal property. Your tenant trips and falls at one of your properties and breaks her leg. She sues and wins damages of $2M. Since all the properties are your personal assets, you're forced to sell all of them (including your personal property) and give the proceeds to her.

Now, let's say you own each property under a separate LLC. The woman sues and wins a judgement of $2M. However, the LLC only has $200K worth of assets. That's the most she could get. Once the LLC's assets are liquidated, she can't go after any other assets. (Assuming you've worked with a lawyer to ensure you're operating your businesses properly to give you this protection.)

An LLC and an S Corp are very similar; the S Corp just has a few more requirements. Note that LLC's are a newer invention than Corporations and that there's less case law regarding LLC's. While LLC's were intended to be treated like corporations, you'd have to find out how judges in your area have ruled to determine whether to go with an LLC or a corporation.

But sole proprietorship exposes you to lawsuit city. You could lose not only your investments, but your personal property as well.

Justin,

There was a posted thread regarding " LLCs" and the suggestion of not including " properties" or " investments" in the name. I did recently speak with a business associate who happens to be a broker, and through phone conversation did confirm this information. We did not go in depth on this subject as I was inquiring on something else, but I will sit down with him in the near future to find out more.

No problem. That is why BP to me is the best thing on the internet for anyone involved in Real Estate. Everyone is always helping each other and providing priceless information. Besides... I want to find out more on this subject for myself as well. :wink:

Investing J,

Picking a name should depend on what you are trying to accomplish. For example, to run a successful rental property business, several LLCs are needed because a large number of rental properties are needed to provide a cash flow that will support living. I always name my companies a very generic name because I'm not trying to build a brand that people recognize. Low income tenants don't care whether they rent from " Outstanding Properties, LLC" or " ABC, LLC" . All they want is a place to live. If you are not trying to build a brand, the name is generally irrelevant.

Another consideration is advertising. If you will have an ad in the phone book, they are listed in alphabetical order. So, " ZZZ Properties" will be the last entry in the phone book and " AAA Properties" will be near the top. Again, you need to consider whether the listing position matters for the type of advertising you'll be doing and how the name affects that position.

If you're trying to build a brand, then the name is absolutely critical. As a flipper, if you're specialize in high quality, high priced properties, then you might want to consider building a brand that reflects that. For " Solid Gold Properties" , might suggest that you specialize in upper income/high quality properties. If you're just a typical flipper, doing primarily middle class properties, " Solid Gold Properties" could hurt your business.

You also need to consider how your business might change in the future. If you are now in the very low income rental business but may change to rehabbing and selling high priced property, " Flop House Enterprises" probably is not a good name choice.

Personally, I always name my businesses something generic. For example, let's say that you're child's name is Kathy Lynn Johnson. You might want to name your company " KLJ Enterprises, LLC" . A company with that name could do anything! Or say that you love to snowboard, you might want to name your company " SB Endeavors, LLC" .

I wouldn't get too caught up in the name. Just decide what the name needs to do for you and go for it.

Good Luck,

Mike

Thanks Mike,

Yeah I agree with everything you said in that post. My business name will need to meet my current plans and my future plans. I plan on building a brand name for this company. I'd like for the business name to reflect positively on my scoop of work. I have plenty of time to think about it. I have a couple homes to flip before really jumping into the LLC. Currently, I am just trying to get as much information as possible.

Just a follow up, I have named the company and bought the websites. I'm in the process of designing the website (which will take a little time). Also, I'm in the middle of remodeling an investment and trying to locate the next property.

For all you newbies, If anyone ever tells you this stuff is a cake walk don't listen to another word they say. It takes a lot of work and countless hours of research and networking. It is possible to start with nothing... Which I have done but I'm no where near the goals I have set for myself within the next five years. I wish all the investors in this forum the best of luck and hopefully we reach our investing goals.

Good Luck!
-J-

This is exactly what I have come across. if you have just a LLC the your llc will fiel taxes then those taxes will be reflected on your personal taxes. You really need help of an attorney to do thsi for you properly.

This has been a very helpful thread! Thanks to all of you who have contributed. I wonder whether anyone can shed a little more light, specifically, on the guidelines pertaining to comingling of funds. For example, assuming I obtain a business checking account in the name of my LLC, pay any bills out of that account, & deposit net rental proceeds, is it considered " comingling" if I take a monthly " owner's draw" by transferring some funds directly into my personal checking account?

wiessman - Co mingling funds means mixing your funds from different ventures together. For example, if you had an LLC but did not setup a separate checking account for the LLC, but instead used your personal checking account, that would be considered co mingling funds. The reason is that you have your LLC (business) funds mixed with your personal funds.

If you are transferring money from your LLC account to your personal account, you are simply " paying" yourself and not co mingling funds.

And Mike - Thanks for your suggestions on naming. I know a lot of people struggle with that topic.