Why I filed for a LLC. Only own 1 property too.
One popular question on BP is the question of "should I file for a LLC" or "Do I need one?"
I definitely do not have that answer because everyones intentions, needs, and goals are different.
But... I decided to file for one because of what I plan on doing with real estate. I think a lot of that decision goes into what you want out of this business and what your lawyer recommends. After speaking with my lawyer and telling her of my goals (short and longterm) we concluded that a single member LLC will do the trick for now. I only own 1 property at this point but I am working hard to grow and make that next investment asap. So eventually I will have a few properties and if assets from 1 property becomes under fire, I don't want my other properties to come under fire. So eventually I would assume series LLC's will be used to keep me safe. Again that is down the road but it also doesn't mean I shouldn't prepare a solid foundation to build off from when that moment comes. It is also not very expensive for me to file for one, which helps...
Again.. This post doesn't have any proper information in it for one to decide what is best for their business or themselves personally. But I always enjoyed reading other people's experiences and why they decided to do something with their business so I figured I'd throw an experience out there.
Good luck!
I'm happy to read that many folks in here are protecting themselves (their assets). An LLC is generally a good choice, but it is wise to sit down with a business or real estate attorney and discuss what you are doing. There are different entity structures to choose from, and various ways to structure to achieve your goals. Your need for asset planning and structure raises, in my opinion, as you build your RE portfolio.
What I hate to see is when folks try to handle the LLC set up themselves. Can it be done? Yes. Is it wise? Generally no. There is a certain dangerous allure with LLCs, because an individual can set one up without any help. But, remember why you're doing it in the first place--to protect your assets (and generally for tax reasons also). Don't save a few hundred just to risk a few hundred thousand. Am I biased -- YES, but nonetheless it's good advice to get professional help.
If you have co-owners/co-investors, then getting your LLC (or entity) structured properly is vital. LLCs offer much in terms of flexibility. Drafting a solid operating agreement can save you a ton of headache later, and there are many options that will help everyone behave.
Also Flippers may have different structure needs than people that are holding properties. By that I mean that you should sit down with an attorney and determine if you should put your construction activities in an LLC and then also put your properties in a separate LLC.
* Nothing in this is meant to be used or relied on as legal advice or real estate advice. They are simply the opinions of the author, and do not create an attorney-client-relationship.
Hi Cody
You can put as many or as few assets into each LLC. I owned duplexes in Rochester and decided to hold both properties in one LLC, the value of the properties was around 100,000. It all depends upon how much you want to place in each entity, but ALL investors should segregate the risk from their businesses with their personal property. Umbrella insurance should also be purchased as an addition. If Erin Andrews can get 55 million for a lawsuit, then anything's possible.
Better to be safe than sorry
Gino
Originally posted by @Joe Splitrock:So you plan to obtain a non-conventional mortgage when you refinance or is there a way to transfer a conventional mortgage into an LLC. I had always heard you could not do this. I would be interested to hear what your bank is able to offer after you talk to them.
Quit claim from your name to your LLC.
Originally posted by @Cody Barrett:
I am not 100% sure quite yet, when I first spoke with the mortgage banker before I obtained a pre approval, she stated that to have the loan be in the LLC it would have to show the ability to finance it. Like I had to personally with a w2 etc.. So when I go to refinance it down the road, if I understood her correctly, my LLC will have show the yearly cashflow/income and reserves needed to have the mortgage be financed by it. It is a smaller local bank..
Quit claim from your name to your LLC.
Thank you @Pavel U.! That is what Brandon does as well. I will look into this. Any scares of banks pushing a due on sale clause for quit claiming?
@Cody Barrett I had a very similar discussion with my lawyer a little while back and started wit one property in the LLC. It is inexpensive and easy to file in Ohio so it was a no brainer at the time and now that I have a few properties its makes life easy already having something set up.
My lawyer also said it is fairly easy to add more layers and holding companies if you continue to grow and need to separate yourself a little more.
Nice! I figure lay a solid foundation and just follow the professionals advice as I grow. It is good to hear that it has made it easier for you.
Another no brainer is just using the first time free consultation from lawyers to get their opinions. lol.. doesn't hurt. Thanks @Account Closed!
Originally posted by @Chad Zaback:
Single member llc are not actually protected by the corporate vale.************
Subject to change depending on the rules of your particular state, and the above does not apply in every state.
I like the trend in this thread though to recommend seeking out an attorney represent your interests. That is probably the best advice anyone can give on an LLC online. Everyone's goals, assets, and business plans are different. There is no such thing as an incorporation cure-all.
I am not an attorney and I have more questions than answers on LLCs but I would like to share some thoughts on this topic:
-NV has always been known to be protective of business and many like to open companies there for the corporate veil protection. The laws are still favorable in NV but they have been raising prices for renewals and there are some bills in the works that may hurt the protection NV has been known for.
-Wyoming is actually being looked at as the new NV. It offers similar protections but costs much less than NV
-Delaware is another popular choice but they are more interested in the big guys, not your single-member LLC. Lots of big companies move there for the protections Delaware offers big companies but the little guys...not so sure about how good you'd be in Delaware.
-Series LLC sounds great in theory but I was cautioned on them since a series LLC is a relatively new concept and there is not much of a history on how courts will rule in cases with a series LLC. In other words, it will be hard to find cases to support your claim if you have a series LLC while you can find plenty of cases to support just about any legal issue you may find yourself in with a plain old LLC.
-Umbrella insurance is a huge pain in the *** to get. Every insurance company you talk to will have different rules and requirements. It is not like buying car insurance. Way more rules and they vary from company to company. Also, I've heard of cases where umbrella only kicks in when all of your other insurances have been exhausted and there are some other "got ya" clauses so if you are going with umbrella, make sure you know exactly how it works, when it kicks in and what it actually covers.
-I like having an LLC and a trust. The way it was explained to me is that an LLC protects your asset from your tenant in case they want to sue you. The trust (assuming you set up the right trust as there are many different ones) protects your asset from you! This is the most common example given: You own an LLC with a rental property in it and you are found to be at fault of a massive car accident. The person you injured can go after your LLC and the LLC's assets because you are the owner of the LLC and therefor, the LLC and it's assets are your assets. A trust prevents this from happening because a 3rd party (trustee) would be set up to "own" the LLC but can only act on your (the trustor's) instructions.
-The idea about having yet another LLC function as an equity clearing house (or a bank that mortgages the equity in your properties) for your other properties/LLCs is also a great move for an additional layer of protection but it will be yet another expense each year to renew and you have to figure out what the threshold is, when you have a big enough business to warrant this extra protection layer.
I am sure this varies from state-to-state and everyone's situation is different so by no means do I claim that this is a definitive guide. I am merely throwing out some perspective that will hopefully get your ideas flowing and maybe generate some additional questions to review with your lawyer and asset protection team.
@Russell Gronsky, I'm on board with most of what you said except for a few things.
- in my experience Umbrella Insurance is very easy to get and should be your first line of defense. In the vast majority of cases it will be more than enough for most investors. It is purpose designed to kick in after your other insurance runs out. That is not a draw back, that is how it works and is one of the reasons it is so inexpensive comparatively, because the odds are it will never have to kick in. The draw backs to insurance alone in my opinion are that, as you alluded, you need to understand all the small print. You don't want to find out you are not actually covered or have to fight your insurance company to cover you. They will decide if they are going to fight or settle any given case, not you. And finally, it is always possible to be sued for more than your policy.
- your thoughts on trusts are not entirely incorrect but there is A LOT more to it than that and to achieve the types of protections that you are talking about with a trust requires you to give up a lot of control, much more than you alluded to. For example, a revocable trust that allows you to control and benefit from your interest in the LLC will quickly be dismantled in a judgment. There are ways around that but there are significant consequences that should be considered to ensure it is the right set up for a given investor.
- the same is true for having an LLC as a "clearing house". This is certainly doable but must be done right or a creditor will just have it all set aside and/or disregarded.
You do bring up some good points and I think it is important to bring that stuff out in the forums otherwise people will just get whatever their "expert" tells them they need. When I was setting up my stuff I went through several attorneys before settling on one because they could not adequately answer my questions about some of the very things you brought up. It was either deer in the headlights or some kind of dismissal but it was clear they were out of their comfort zone. Knowing what to kinds of things to ask about definitely gives you a leg up.
It should be mentioned in this post, that an owner should contact their lender regarding the transfer of property from one entity to another. Some may call the loan due, or require that the deed be transferred right back to the individual. Also, there can be tax implications when doing the transfers.
We are using a C-Corp as manager for the properties that are held in each cell of a Texas series LLC. Our CPA gave us guidance, and set up the structure. Our lender is private, and is flexible about repayment.
@Edward B., Thank you for the kind words and you are right, I did skip over a lot of important details about trusts. But I did it for the sake of keeping the novella of a post I put together from turning into a full blown novel. And you are right, revocable trusts don't do much in terms of asset protection. The irrevocable ones do but they come with their own stipulations, hence I said that my thoughts on the topics are meant to just stir up some of your own questions to ask your legal team. I'll let those experts explain the differences among the 10+ different types of trusts (at least I think it's 10) and which are advantageous to what properties, etc.
As for umbrella insurance, I was going off of my experience trying to get some for my assets. One company wanted me to move all my insurances for other properties to them before they gave me an umbrella insurance. Another company wanted me to move my car insurance to them and raise my insurance values on my other assets before they gave me umbrella insurance. A third company wanted me to sell my motorcycle before they would issue me umbrella insurance. Ultimately I decided this was not worth the trouble and went with my LLC set up. If you had an easier time getting umbrella insurance then I'm glad not everyone had to deal with the pain I did.
I agree completely with you on doing the clearing house LLC right. I wouldn't attempt to put together a legal structure like that on your own. It is totally worth hiring a professional to help you do that.
Overall, great discussion on here. I learn something new in every post and thread I read. Thanks for contributing to my education.
-Russ
Originally posted by @Gloria Mirza:
To protect your properties you would need to have one LLC per rental. Right now with one rental that's fine, but as you grow you would need more LLC's. If you have all rentals in one LLC a lawsuit could force you to sell all properties. Here in California it cost something like $500 per LLC, umbrella insurance would be a cheaper bet.
Hi Gloria
Agreed, in NJ a million dollar umbrella is just $200 a year, plus i am still deciding about protecting my property under an LLC.
My question is, it is paid in full and i need to pull cash out of it to buy another property.
Do you know if its easier to pull cash out if its a LLC or just under my name as it is now?
thanks
Dennis
Originally posted by @Jeff B.:
hmm; When I Foreign Filed my Nevada LLC in California, it cost me $800/yr
Guess I got cheated!
in NJ, my attorney wanted $1500
Originally posted by @Jorge Ruiz:
For what it's with let me tell you guys what just recently happened to a friend of mine. One of his tenants slipped and fell. The tenant most likely would have been ok but since a chunk of the cinder block wall on the owners property had some how broken, the tenant hit his head on the cinder block on the way down. This happened last week and the tenant is still in the hospital. Fortunately for the owner (who I saw today) he's treated his tenants well. They don't want to sue him( I'm sure the tenant can still change their mind) as of now. But he doesn't not have his property protected by an LLC or in a trust. If this tenant wants to sue him, he is up the creek with no paddle.
As for feeling ripped off because you filed your LLC in Nevada- I'd rather spend the extra money because Nevada LLC laws offers way more protection that California. I've heard and read that Delaware is even better than Nevada.
Just my 2 cents guys... Best of luck to you all.
Jorge
Im in NJ and just figured my LLCs would be in NJ. SO you are saying there are significant benefits by setting up the various LLCs per properties in a different state?
thank you
D
@Dennis Cuocci I am no expert on how to set up LLCs because I have yet to do one. In my research I have found that Deleware and Nevada offer the best protection. I intend to file in Deleware in the near future while I own property in California.