Investor · Mexico City, Mexico · Member since 2016 · 100 posts · 19 votes
Hello,
I am not yet in a position to fully use the benefits of an LLC. However, I do plan to use one in the future.
Would it be wise to go ahead and set one up and start building business credit with a secured credit card?
What would be the cost or ongoing fees to do so if the entity had no assets?
Does an LLC that is aged have benefits over one newly created?
Thanks!
Specialist · Lakewood, CO · Member since 2014 · 1k+ posts · 1k+ votes
10y
Hi @Reece O.. The cost will vary quite a bit from state to state. In Colorado, it's $50 to set it up, then $10/year to remain in good standing. I think CA is $800 to set up and $800/year. Getting your EIN takes 5 minutes and is free, so don't worry about that. You would have to check what Kentucky charges. I would expect that it is probably fairly inexpensive. I think the same philosophy applies with business credit as with personal: start building it before you need it because it can take years.
Specialist · Lakewood, CO · Member since 2014 · 1k+ posts · 1k+ votes
10y
Hi @Reece O.. The cost will vary quite a bit from state to state. In Colorado, it's $50 to set it up, then $10/year to remain in good standing. I think CA is $800 to set up and $800/year. Getting your EIN takes 5 minutes and is free, so don't worry about that. You would have to check what Kentucky charges. I would expect that it is probably fairly inexpensive. I think the same philosophy applies with business credit as with personal: start building it before you need it because it can take years.
In Kentucky, it costs $40 to file your Articles of Organization with the SOS as well as $10/yr to file your annual report with the State. It takes all of 5 minutes to fill out the online form to do it.
Also, even if there is no activity at all, the state has a minimum organization tax for LLCs (and Corporations) that is $175 regardless if you do any business or not.
Other than that, I don't believe there are any other fees that you would have to pay.
Investor · Owensboro, KY · Member since 2008 · 130 posts · 65 votes
10y
@Reece O.,I would urge you to look at the bigger picture before forming and operating under an LLC.I believe it was Jay Hinrich that recently wrote a piece on LLC formation and utilization that I wish I had read before forming our LLC.Basically he said unless you have significant amounts of assets to protect your wasting a lot of time and money with LLC formation and maintenance.Also some banks will automatically classify you as a commercial borrower thus eliminating you from conventional lower cost loans available to individuals and maybe not the LLC entity.That's what happened in our case,keeping us from taking advantage of conventional lower cost loans.We had assets to protect but could have done it by borrowing against the property and an umbrella liability policy without the the hassle of the LLC.Bottom line is their are more effective ways to protect your interests other than a LLC and its consequences.Do more and better homework than I did and you may save yourself some money and headache.Good luck in whatever you decide
Investor · Denver, CO · Member since 2015 · 492 posts · 267 votes
10y
LLC are for Legal Protection. Put every house in a separate LLC. If you get sued with a "blanket" or "umbrella policy" they can get at ALL of your equity in ALL of your property as well as your personal bank accounts and private vehicles, etc. if the house that gets sued is in a different LLC from the rest, they can only go after what is in the LLC. They can't go after personal bank accounts or the other houses in other LLCs
LLC are for Legal Protection. Put every house in a separate LLC. If you get sued with a "blanket" or "umbrella policy" they can get at ALL of your equity in ALL of your property as well as your personal bank accounts and private vehicles, etc. if the house that gets sued is in a different LLC from the rest, they can only go after what is in the LLC. They can't go after personal bank accounts or the other houses in other LLCs
I have a few questions about your reply which is pretty interesting someone a while back told us that it's a good idea to have separate llc but didn't get into details so I hope you can answer my questions.
You said to put every house on a separate llc, so if we flip 3 houses per year each one should be on a separate llc and if we get 2 other properties to keep as rentals does each rental need to be under a separate llc or should the rentals be under one llc?
The other question I have is do we open one business bank account under another llc for all monies from all flips and rentals to go into or do we need to open a separate bank account for each flip and another bank account for all rentals or each rental?
Is an llc forever or does it disappear once the flip is sold?
Also what backs up the llc on each flip/ rental do we need to get insurance on each llc, how does that work?
We have been doing 1 flip every 1 or 2 year for the last 12 years and have just been using our personal bank account, but now want to take it more serious, someone a while back mentioned to us about the llc but was very brief. We want to understand it better.
I thank you in advance for your time and feedback.
Investor · Green River, WY · Member since 2016 · 47 posts · 13 votes
9y
@Lucero Sanchez I think that the whole separate LLC for each house would only apply if you were to buy and hold. I think you should be fine with 1 LLC if you flip because you will be selling the house and therefore no longer have anything to do with that property afterwards. This is just an example of why separate would be beneficial, say you buy and hold 2 apartment buildings on an LLC, Separate purchases. One day you have a tenant slip on ice and fall and sues you. Since you have both under 1 LLC, that tenant can get from equity from both buildings verses if they were separate, they could only get money from their apartment building they live in, thus saving you money by separating them. I hope this helps.
Investor · Calgary, Alberta · Member since 2016 · 69 posts · 49 votes
9y
In my opinion @Robert Herrera is right. It is about liability containment. If you are sued for something relating to a property held by an LLC, the idea is that your liability is capped at the holdings inside that LLC. Assets outside that LLC should be safe. Contrary to what some say, I do not believe there is any difference from the perspective of how much tax you ultimately pay versus holding assets in your own name. LLCs are supposed to be "transparent" from the perspective of taxation.
There are many with opinions that the liability protection of an LLC is not bullet proof. Possibly true but risk goes way down, as long as you operate the LLC "properly"...which means taking care of documentation and not mixing business related to assets inside the LLC with business related to assets outside the LLC. If you don't run the business of the LLC as a proper business (poor documentation and mixing business) it will be easy for others to make the case that the LLC isn't really a business and the liability protection should be void. Search on "piercing the veil".
So...your questions: an LLC doesn't come or go automatically. You set it up and do business in it. If your LLC sells a property and buys another, that is totally fine. You would decide how much/many assets to hold in the LLC based on your tolerance of risk versus administrative hassle. If you want to minimize risk then you would hold only one asset at a time in an LLC so any liability risk is contained to that one asset. However each LLC has a cost to maintain, and administrative workload. For Arizona, the state costs for setting up and maintaining an LLC are negligible if you fill out and submit the forms yourself. It sounds like some states are more expensive. In my opinion the biggest hassle related to an LLC in Arizona is filling out and submitting tax forms. Each LLC requires a 1065 tax return federally and a 165 tax return at the state level. So having two LLCs is twice the hassle and expensive if you need an accountant to do it for you. I believe you can group LLCs and consolidate tax submissions but I don't know enough about that to speak about the pros/cons or how to do it.
So what happens if a flip is under one LLC and no other properties are on that LLC and the flip sells, how long after the sell of this flip can the new owners go after the LLC if something goes wrong with the property, like electrical, plumbing, leaky roof etc., or does once the property has been sold the LLC has nothing to do with it, if does have something to do with the LLC how long till the LLC is no longer liable for that property?
Investor · Green River, WY · Member since 2016 · 47 posts · 13 votes
9y
@Lucero Sanchez I am still new to this as well and have never flipped but, in my readings, it would all depend on what the wording is on the closing paperwork. I would suggest something to the fat like " Upon purchase, buyer assumes all responsibility of property and .... LLC is no longer held liable after sale is finale. " . Or something to that affect.
Investor · Denver, CO · Member since 2015 · 492 posts · 267 votes
9y
@Lucero Sanchez When you sell a house, it's sold AS-IS. This is already in the contract when someone wants to buy. That is why they have an inspection period. The property is in the name of the LLC. When you sell it, the property goes in the name of buyer. Now you can flip another property from the same LLC. No one can come back and get you once the sell is final. Hold all of your rentals in different LLC's. When it comes time for taxes, it's easy to put these in line with the rest of your taxes. Cost me about $50 to file taxes for each LLC/ per year, from my CPA.
Contractor · Queen Creek, AZ · Member since 2014 · 155 posts · 37 votes
9y
@Robert Herrera Ok got it, so I understand why separate LLC for rentals but flips is it so if there is an accident and someone gets hurt like a worker during the renovation they can go after the LLC not our personal assets? What back ups the llc on flips/rentals do we need to get insurance on each llc or a bond, how does that work?
The other question I have is do we open one business bank account under the same llc we will be using for flipping and all monies from all flips and rentals go into the same bank account or do we need to open a separate bank account for flips and another bank account for all rentals or each rental?
Sorry I am drilling you for answers it's just I want to make sure I have my ducks in a row since my husband is putting all the paperwork responsibility on me. I have been doing my own research at the library and even speaking directly to customer service where you get the llc but they don't seem to understand my question or maybe I'm not asking the right questions. But it seems you understand my questions. I would like to take classes somewhere to learn more about this. Do you recommend anything?
Contractor · Queen Creek, AZ · Member since 2014 · 155 posts · 37 votes
9y
@Robert Herrera one more question, sorry, right now we have funds from our last flip over $150k in our personal bank account, but we hope to break ground this week on a house we will be building for us to live in for at least 2 years. Once we get our LLC name and EIN to open business bank account should we transfer funds to the new business account or leave it where it is?
Investor · Denver, CO · Member since 2015 · 492 posts · 267 votes
9y
Lucero Sanchez you need 1 account for your rentals. Money comes in, mortgage payments go out, you get paid. You can hold funds here for repairs, etc. Easy to track easy numbers. Open a separate account for your flipping business. Put your seed money in there, this is not taxed as its not considered income. Buy things for the flipping businesses from this account such as tools and materials, labor, phones, loan payments, everything. All of that is a huge write off.
Insure your rental properties with the LLCs as the owners, get landlord specific insurance. Insure your flipping business with business insurance. As well your subcontractors should have their own insurance. This is to protect against being sued for some reason. Yes separate yourself so they can't get your personal assets, money, home.
Contractor · Queen Creek, AZ · Member since 2014 · 155 posts · 37 votes
9y
@Robert Herrera I understand you are not an attorney or paid adviser but it sounds like you have allot of knowledge in this field I thank you for your help and your time. I feel more confident in moving forward with this LLC thank you again.