LLC now or later?

30 Replies

I hear conflicting information on rather you should wait until you get a few deals under your belt before making your business an LLC and getting it as soon as you decide to get in real estate investing.

What did you do and/or what are you deciding to do? 


Hey @Aquila Phillips - I personally did not set up an LLC for my first few deals and still have a property that is not owned in an LLC due to the financing arrangement on it. It would be nice to have it set up from the get-go, but that's just one more thing for you to have to figure out right out of the gate. If you can set it up from the start that would definitely be the way to go, however if you decide not to and end up doing so down the road it won't be any big additional hassle.

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@Aquila Phillips ,

It depends on your goals.

If you need a clean credit profile but your personal credit is not healthy, you can build credit in your LLC separate from your SSN as a "second chance".

Lenders like to see at least one - sometimes two - years in business. Start that clock!

I'm in the process of becoming a business credit educator. I'll post about it - probably in the market place forum - when I'm ready to start presenting. I already have substantial business and consumer credit education from the REI education to which I'm connected. It's just a matter of learning the new program's format and syntax.

Generally speaking, wait if you're in a state like California that charges you an arm and a leg for the privilege of having an LLC, and file now if you're in a state like Mississippi that doesn't charge domestic LLCs annual fees.

I've been listening to some Podcasts and ran across a CPA and attorney named Mark Kohler. He thinks says that if you don't plan on holding the property for at least 12 months, you should do an S Corp. This is the first I've heard this suggestions. What are your thoughts? 

Being that we're in California and do get hit with that annual $800 for the LLC, I've been on the fence for whether it is worth it. But, since starting it and hearing that it needs to get seasoned for creditors to take it serious, I am glad we've opened it now.
If real estate investing was a new concept to me, maybe not so wise. In case we decided REI is not a venture we want to pursue, since it would mean more work to undo.
But, already waiting several years to get started with REI, I know that it is something I'm going to continue to pursue, come hard/rough times. I know I want to operate through the LLC as well, so starting it sooner than later sounds like it is the right thing to do for us.

Yes, it costs $800/year to have a LLC in CA. However, it's a tax write off. So, as long as you make money and the LLC provides some assets protection then it's worth it.

Also, if you plan to operate or do any business in CA then you need to pay the $800. The sate catching on and I don't believe you can get away with it.

@ Aquila Philllips - Mark Kohler is a very knowledgeable attorney and CPA. I am not sure what you mentioned about 12 months period. This might be more about the capital gain for tax purpose.


Also, you need to have an entity (LLC, S-Corps) for tax write off. Again, and entity does provide some assets protection as well.

If you don't live in CA, then I believed it's wise choice to open a LLC (out of the gate) as benefits are out weight the cost.


Hi @Aquila Phillips

Whether to setup an LLC or not at all depends in your situation.

Here's not to setup an LLC

If you buy cash for a property as an owner-occupied, or an investment (hold), you have no liens, you do not owe the government, you do not owe any lenders, and you have wages to support its maintenance and utilities, then you don't need and LLC.

You have wages to support bi-annual property taxation payment, you don't need and LLC.

You have no tenants in your investment property, then you don't need an LLC.

You have no medical conditions that will use your savings in the next 5 years, then you don't need an LLC.

You are fully insured that will pay you or your estate in case of accidental injury or incapacity, or end of life term, then you don't need an LLC.

Your wages can support your daily living, then you don't need an LLC.

@Aquila Phillips people are avoiding the obvious question which is what is your business? It is kind of hard to recommend the business structure without knowing the business. There are several aspects to REI including fix-n-flips, buy-n-hold, property management and the list goes on. Getting an LLC for the sake of getting an LLC is what I did when I started, then found out it was useless in my situation. Yours could be totally different.

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@Aquila Phillips ,

Yes - Mark Kohler is my group's tax and legal expert, also.

Mark's conventional wisdom is that you hold property in LLCs and channel cash flow thru your S-Corp. The S-Corp lets you do the salary / dividend split (1:2) to limit your self-employment tax liability.

That will be useful when you go into rentals. Until then, build credit in your business entities to make buy-and-hold and even fix-and-flip a good bit easier later on.

As one of my mentors says, "Dig your well before you get thirsty."

Originally posted by @Samuel R. Harden :

Generally speaking, wait if you're in a state like California that charges you an arm and a leg for the privilege of having an LLC, and file now if you're in a state like Mississippi that doesn't charge domestic LLCs annual fees.

My mother who lives in California set up her LLC in Mississippi for precisely that reason. She needed an LCC even though she only owns one investment property because it is held in a self-directed IRA which requires an LLC.

Originally posted by @Aquila Phillips :

@Joe Splitrock, I am wholesaling property.  Eventually, I plan to buy and hold (rentals) as well.  Your thoughts? 

I do not have experience with wholesaling so I am not the best person to offer advice on that. If you setup LLC then it is best to have separate for both. I do buy and hold without LLC mainly just to qualify for financing. Conventional mortgages cannot be acquired or held by LLC which is how I buy my properties. The other issue is your LLC has no credit day one, so hard to get a loan starting out. Wholesaling may be fine since you are not financing anything.

I have found my LLCs to be the best fit for passive income, long-term commercial asset holds.

Nowhere in any of that is short or no-term wholesaling of residential houses.

A lot of short-term, active income operators (wholesalers, flippers, managers, book-writers, etc) for SE advantages, set up an s-corp or have an LLC that is taxed as an s-corp.

Wholesaling and flipping are jobs.  Jobs need SE advantages.  

@Susan Maneck Tell your mother to talk to a professional though. A California resident who owns a Mississippi LLC would still be required to file and pay the Cali LLC Fee under California FTB rules. I'm not sure if the fact this is through a self-directed IRA will affect that.

From my understanding,  one of the main differences between an llc and an s-corp is that the s-corp will also shield your personal assets.  If you get sued for mold, lead based paint, trip and fall, etc....your personal belongings will not be part of the payoff.  

Make sure when you attorney calls, your day doesn't get worse.  

i know that conventional lenders don't typically lend to llc's (unless perhaps you've already built up credit), are there other lenders who will? i plan on utilizing the brrrr strategy and want to set up an llc, but also want to refinance out of my purchases. any thoughts? 

I have a question, I'll be moving to PA soon and will be back to another state (hopefully CA) after about two years. I think it's a worthwhile question for those who also might be in situations where they need to move around. Is there a lot of trouble in transferring LLCs/other business entities state-to-state? 

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