Business Management

3 Reasons NOT to Buy an LLC Online

Expertise: Business Management, Personal Finance
43 Articles Written
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Perhaps you already know the importance of using a limited liability company (LLC) or other entity to run your real estate business and protect your assets. You might even be among the real estate investors who have begun researching entities and how they are formed.

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If so, it’s safe to assume you’ve turned to the internet to find out more. Have you encountered online businesses offering to form an LLC for you at an extremely discounted price?

I’m betting you have. Tons of sites offer extremely cheap (or even free) articles of incorporation or other LLC-pertinent documents.

Buyer beware! These offerings are usually too good to be true. More importantly, these services are not adequate substitutes for the guidance of a qualified attorney.

The appeal of paying a low fee for a prefabricated entity is understandable. Using an online service or template may seem like a convenient way to save a few bucks. But unfortunately, it’s a risky proposition that could end up costing you more in the long run.

Here are just a handful of reasons to avoid buying an LLC online.

row of seven doors where all are painted white except one which is yellow

Online LLC Services Offer Limited Choices 

If you search for options of cheap, easy-to-form entities, you’re likely to see businesses serving up LLCs like hotcakes. You might find vaguely-worded documents for limited partnerships or joint venture agreements, but you’re unlikely to find other types of entities that may serve you better, like the Series LLC.

Limited choices for your entity are a drawback in their own right, but this issue becomes even more problematic when you consider that the best entity for you may not be available through an online service. Therefore, you might fail to become aware of it altogether. 

Here’s an example. Mark is an investor in California preparing to buy his first three properties with a partner. He has heard from other investors about LLCs and begins researching how to get his own. If he contacts an attorney, that attorney would most likely pry, questioning Mark’s motivations and determining if an LLC is the best entity for him.

Let’s say that in Mark’s case, an LLC isn’t the perfect fit. He needs a Delaware Statutory Trust instead, which is much more complex than an LLC and not typically offered through online services. The lawyer would inform Mark that if he chose to form a traditional LLC, he would owe the State of California $800 annually in franchise tax—a lesson the online service would gladly let him learn the hard way.

Related: The 3 Best U.S. States for Forming LLCs or Series LLCs

Online LLCs Are Cookie Cutter Entities

There is a reason the traditional LLCs you see for sale online are so cheap. The documents are all the same. They do not account for your specific situation.

An attorney, on the other hand, will tailor your documents to your needs. They will ask you questions and make recommendations based on professional experience, as well.

Most importantly, they will worry about whether the documents they file for you will hold up in court and effectively accomplish their intended goals. An online service can’t complete such analysis.

cluster of red game pieces and one solo purple game piece set against light blue background

Related: Is it Wise to Set Up an LLC When Starting in Real Estate Investing?

Lack of Contact With Professionals

The bulk of the problems associated with using an LLC formed online stem from the lack of an invested professional’s oversight. The reality is that a competent legal professional can do a lot for you that these online companies simply cannot. 

Entity formation is typically the domain of business attorneys, but many real estate attorneys are experienced in this area, too. If you are also using your entity for asset protection, hiring an attorney with experience protecting real estate assets can help you effectively avoid lawsuits.

All the online service will do is sell you the entity; that’s it. Therefore, there’s no way an automated service can compete with the personalized advice of an experienced attorney.

Money might motivate you to choose otherwise; however, I recommend against the online route. A good attorney will save you more money than they will cost you—especially if you plan to be in real estate for the long run—whether it’s through tax savings or preventing costly litigation.

Do you agree? Have you heard stories of any LLC-related misadventures? Or experienced any missteps yourself?

Comment below.

Scott Royal Smith is a real estate asset protection attorney based in Austin, TX. His firm, Royal Legal Solutions, designs asset protection strategies exclusively for real estate investors. As an investor himself, Scott is sensitive to the needs of real estate investors; as an attorney, he maintains a working knowledge of the best legal strategies available for preventing lawsuits. Connect with Scott here on BiggerPockets or visit his website, www.royallegalsolutions.com, for more information about asset protection for real estate investors. Check out all of Scott’s previous work for BiggerPockets here.

    Margie Kohlhaas Rental Property Investor from Algona, IA
    Replied 7 months ago
    I own 5 small single family rental homes. My accountant told me that it would be $800 per home if I formed an LLC. She advised me to talk to my real estate attorney, but she also mentioned that putting more money towards an umbrella liability policy might be a good solution rather than spending $4000 in taxes per year.
    Scott Smith Attorney from Austin, TX
    Replied 7 months ago
    I would assume that you are working from California if you are looking at annual costs of $800 per LLC. It sounds like you are looking for ways to protect your wealth and assets, but some of these strategies can be very expensive. One option for investors from California who want that protection is the Delaware Statutory Trust. It currently does not incur the annual $800 (min.) franchise tax, but still allows for much of the same utility and protections of an LLC – along with the added benefit of functioning like a Series LLC allowing for compartmentalization of assets/properties. The problem I have seen is that many investors will go and buy the online LLC forms and establish their entity, then start getting hit by the fees and costs. It can get even worse when they may have chosen a poor form, or didn’t include the correct language, and lose the protection they believed they were paying for. It is good you discussed your options with an attorney prior to moving forward – some people just pull the trigger and get slammed with the $4,000 fees and dissolve everything after taking a huge loss. Sounds like you took a great step in seeking advice. When I personally seek advice for my own investments I usually will hunt down several professionals for any question I have and measure their answers against one another. If they all say the same thing – I am generally pretty comfortable. But if some have different advice than others, these are the topics I end up diving into and educating myself on until I find the best option. I encourage other investors on BP to do the same, keep learning and measuring options. If you are persistent you can usually find a solution that accomplishes both your primary goals and cuts down on additional costs.
    Bo Wagner Attorney from Brookhaven, GA
    Replied 7 months ago
    Where are you located? That seems an open-ended statement (e.g. WHY would you owe $800 per home? Why $4k in taxes–what kind of taxes)? Most LLC’s are pass-through entities so it seems you (individually) would owe taxes on any income; if more complex, then perhaps something else is happening here?
    Christopher Smith Investor from brentwood, california
    Replied 7 months ago
    She’s no doubt in California, filing fee (not a tax per se) of 800 for each LLC.
    Bo Wagner Attorney from Brookhaven, GA
    Replied 7 months ago
    Ouch! GA filing is $100 and annual renewal = $50.
    Account Closed from Kyparissia, Messinia
    Replied 7 months ago
    We are investing from abroad. So I doubt very much if any online platform creating an entity will be suitable. There are so many technicalities and tax regulations to consider, I wouldn’t do anything without consulting an attorney. As first time investors, I also question the need to form a corporation for just one property at least not in the beginning. Wouldn’t paying for full coverage liability insurance be enough? As well as requiring tenants to have their own insurance?
    Scott Smith Attorney from Austin, TX
    Replied 7 months ago
    Hi Estelle, It really comes down to your specific situation. For someone who only has a single property and isn’t facing much personal exposure (don’t own a home or other businesses) then you don’t have much at risk. For other investors who only have one investment property, but do face quite a bit of personal exposure (let’s say you own your own house as well as a vacation cabin,) then in the case your insurance refuses to cover a big claim everything that investor has is at risk. It’s not common, but it does happen. Ultimately I often break it down into “pillars” of asset protection, and as you grow and develop more exposure you would introduce more “pillars.” For someone just starting I often recommend ensuring that properties are managed amazingly well and having a good insurance policy. But as you grow you are entirely relying on insurance, which isn’t always going to save you – next time you get a chance go read through all the exclusions, the wording (especially around “degrees of fraud”) can be pretty flexible for the policies. As you grow you start to introduce legal entities that separate your assets and liability, so if your insurance does refuse to cover a claim you only lose a portion of what you own – IF the law suit happens. After you have that established you can introduce “operations companies” that wont actually own any properties/assets, but conduct all the highest liability actions – this way you only lose the “shell company” in the case of a law suit when you operate this correctly. After this you can also introduce anonymity through the use of trusts, essentially removing your name from public record. There are many more “pillars” you can introduce, but the general concept is that as you grow you continue adding more “stop-gaps” into your strategy. This isn’t necessary for a beginning investor, but as you grow you face higher chances of being sued and you have a lot more at risk. The reason it is good to chat with a professional about this (versus just copy/pasting a form online) is that they can help you navigate the decision. I lay out the options and investors will often choose what they are comfortable with. But most people don’t understand how easy it would be to lose everything until they talk with an experienced attorney.
    Jim S. from Cleveland, OH
    Replied 7 months ago
    I set up my LLC last year using LegalZoom.com. I’m currently filing my taxes and my accountant hasn’t found any issues with the way my LLC was set up. Would you include LegalZoom in with the group you’re referring to? They’ve been around for a while and have a fairly decent reputation from what I can tell. I’m obviously concerned about future issues arising. Thanks.
    Scott Smith Attorney from Austin, TX
    Replied 7 months ago
    Hey Jim, I do, but not in a way to say their documents are wrong necessarily. The issue you get with LegalZoom is that you only get what you are looking for. This means that you often miss out on ways you could optimize your protection or streamline tax season. There are also additional measures that you don’t hear about. While you may be able to set up an LLC through LegalZoom well, you may miss out on additional protections that an experienced real estate professional would know. While you can place your property into an LLC that is functional, you don’t hear much about how to remove your name from public record through the use of land trusts – which just increases the costs for anyone looking to initiate a legal case against you by a significant amount. And in the case you own several properties and want them separated, instead of creating multiple LLCs you could go the route of the Series LLC (or even the DST, if you are from California.) This would offer you the ability to scale without the necessity of filing for new LLCs each time, as well as streamlining for taxes. Some people can figure out these entities and eventually build pretty strong asset protections for themselves DIY style, but I also see a lot of people putting a lot of effort and some money forward into entities that will accomplish nothing for them. The danger of doing this stuff online is that you won’t know which group of people you are in until there are issues with your taxes or you don’t get the protection you need in the case of a lawsuit. Once a lawsuit has been threatened, you cannot restructure your assets – what you have is all you get at that point. I encourage people to, at minimum, have an attorney and CPA review their entity. For anyone who is shifting into real estate investing I heavily recommend have an attorney form those entities for you to ensure they are correct and will scale with your businesses/investments.
    David Lee Hall, III Rental Property Investor from Pittsburgh, PA
    Replied 7 months ago
    I found issues with both LLC and C-Corp filings using two large large national online companies. Yes, they were cost efficient and quick, but in both cases they did nothing regarding state-specific laws. They didn’t do any state-tax roll setup nor did they complete advertising and publication requirements for entities in my state. This left me still incurring local attorney costs that effectively eliminated the saving I would have had. As has been mentioned in other comments, know you needs and local legal requirements before engaging them. Make sure they will cover those items. Otherwise, you make think you are set up appropriately, but could be liable for intricacies that they did not complete.
    Vanessa Hammonds
    Replied 6 months ago
    Hi! I am fairly brand new to investing! Thanks for posting this article 🙂 I purchased a property in what is now a hot spot in Houston – I have done some renovations and mostly rent it out on Airbnb. The ARV is a little over 3x what I paid 5 years ago. Now I want to begin wholesaling…or leveraging the equity I could have in my home with a HELOC to rehab and flip. I’m researching what I need to do legally to get started…since you are in Austin – would you say I should speak with a real estate lawyer in Houston? If so do you know of any on this platform? (I just joined yesterday) Thanks in advance Vanessa
    Jason Bott Insurance Agent from Milwaukee, WI
    Replied about 1 month ago
    Hey Vanessa, just a heads up that Scott does practice in Texas, and you can read in some of the other articles that Jurisdiction is at the state level. You don't need a Houston-specific attorney to form a Texas entity. Messaged a legal writer who works for him, and she's confirming: "Correct, a Houston-based investor can use an attorney from anywhere. Using anyone in Texas is the easiest most obvious option since we've got great charging order protection here, no taxes or annual fees, easy compliance, and low cost of formation. You can even try out our Series LLC for just $300 (at the time of this writing). Please tell Vanessa she may add me if she has additional questions on establishing LLCs for asset protection. Actually, no investor's limited to their state at all. Vanessa happens to be in a great state for LLCs, but if she wasn't, even then, she could still form in Texas. Investors always forget the number one thing to do if you don't like your state's rules is to say "Screw those rules. I want to play by another state's rules." Because here's the thing: you can do that. American businessfolks and REIs have been for decades, so join the pack--it beats having a property in your OWN name. And heck, if it's anywhere near Montrose or something nice, that's a juicy asset. But at the rate Houston's growing, The Woodlands will be a hot spot soon enough haha. No offense, I have mad love for the Woodlands. And hey, go Astros! Thanks, Mary Browder" She's here on BP if you want to connect. She helps me understand this stuff and help explain my area, insurance for investors, and is always happy to talk with folks who want to know more about the law in plain English.