Should I form an L.L.C first?

Question

I just talked to a friend of mine who said I should form an LLC  first and make offers and bids etc thru the LLC and If I were applying for Hard Money I should do so thru the LLC but usually I would have to give a personal guarentee. what do you think?

Bill Gulley · Answer

Hi, In setting up any business you should consider the risks involved. The primary reason for the LLC is to protect us from claims reaching our personal life. Consider where the risk lies.
There is not much risk associated with purchasing real estate, as a buyer if anything goes wrong, it's usually going to due to the seller, lender or closer failing to disclose or perform. The recourse available can be accomplished as an individual. The only real aspect of any risk in the purchase transaction for a buyer is if the buyer fails to perform. I can see where buying a property can terrify new investors but in any standard contract financing is a contingency unless otherwise agreed. Simple due diligence will aid any new investor and contingencies exist to get out of the transaction, a LLC won't motivate you in getting started and talking that first step.
 
Where the risk exposure is the greatest in real estate is in holding the property, especially for rentals. Slip and falls, claims of LL negligence, code violations that lead to injury or death are issues that can bankrupt you if you hold a property in your personal name. Rehabs carry even greater risk of injury from workers and others on the property.
 
Additionally, selling property carries a higher degree of risk than buying since claims may be brought by a buyer for failure to provide disclosures, anything from lead paint and asbestos to exagerated claimes of LL income from operations or failing to disclose that a government entity had inquired with you 3 months ago about selling the property to facilitate some public purpose. There are many issues a buyer can rase when they are not happy with a deal.

So, IMO, the highest degree of risk associated with real estate, from highest to lowest is; holding property, selling property and then buying a property.

If you acquire a property and then set it over into an LLC, you have really covered your greatest exposures.

As to funding, you can borrow in your name and then set the property in the LLC. So long as your LLC is closely held (not made up with several members where you hold the majority interest) there is no problem with such assignments. Some lenders may fund in the name of the LLC and simply require a personal gurantee. It is true that it usually takes several years of doing business establishing the capacity to pay for a lender to provide funding on a non-recourse basis to an LLC.

When considering setting up an LLC, as mentioned before, you need to establish your business plan, and answer questions or establish strategies that may arise in the future. Your main concern will be limiting your liability, then tax consequesnces, flexibility in operations (admiting future partners if only for a short period of time) setting up your estate and holding assets and what happens in the event of your  death or incapacitation. How a company obtains financing is not really an issue in structuring it, how it is to function is the main concern. Bill

Jim Murphy · Answer

Just an add on to my question, The reason I wanted an llc or indeed a s corp is if I engage in flipping a property can the check I get upon closing go to llc as though it were a sale or do I pay taxes on each property at the salary rate .

Will Barnard · Answer

Not sure who your "guy" is or why he can only do busines with an S corp. Sounds fishy to me and that should be a red flag to you!!!!

Difference between the two:
The main difference is that an LLC is a "pass-thorugh" entity in which the profits or losses are passed through to you persoanlly and on your personal retrun. An S-Corp files its own return and must pay the owner/stock holders a salary.

R Jenkins joshua · Answer

I wish I started LLC before I purchase the property to left thru hard money lender

Heck until I get rid of it I can hardly sleep.. believe start llc or something

Without LLC my behind sitting out their

1 questions : What the difference between LLC and S corp

I have a guy steady emailing that,
if I do S-corp  we can do business

Brian Haskins · Answer

This is pretty common. It just depends on who you talk to. Some say save your money upfront and start an llc later others say set it up first to make sure your protected. I set mine up first.

Brian Haskins

Will Barnard · Answer

Curt is right you do bnot need an entity to make offers or to even buy property, but it is necessary if you plan on using transactional funding and it is recommended for an added layer of liability protection.

Curt Davis · Answer

You do not need to form an LLC in order to buy homes.  Also if you plan on using your LLC to make offers you will need to show proof of funds and typically new LLC's do not have any money or credit so most likely you will be placing offers under your name.

If you get private money and they will write a commitment letter on behalf of your company then you can make offers with your LLC.

Bill Gulley · Answer

David, that's a nice offer jumping in here for your 4th post. Can you fill out your profile so that we can see what you do and a little more infromation? Welcome....Bill

Should I form an L.L.C first?

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