Looking to start investing in January, 2017 in buy-and-hold rentals with an investor group. I want to create my own LLC which will buy into the LLC that owns each property. I'm looking for form LLC in Kentucky. A few questions:
1.) Does it matter if I do it now or should I wait two months (to avoid any annual fees, etc.)?
2.) This would be a single member LLC. Should I still use an attorney, or would an online service like LegalZoom likely suffice?
3.) Is it worth the expense of renting a UPS mailbox for privacy? Does it matter that your name/address have to be disclosed on original paperwork?
Thanks in advance.
My attorney would charge $450 to set up LLC plus filing fees for a total of about $500. Seems reasonable. What do you think?
Is this thread visible? Can anyone read this?
Hi @Mark S. yes, your post is visible :)
You're asking some pretty big questions and there are a variety of answers from a variety of angles! It seems that a lot of the answers to your questions may be dependent on your situation and risk tolerance balanced by the input of an attorney and/or tax expert......
@Allison H. , thanks. In the process of that now. Figured I might get a few opinions on BP beforehand. Very surprised about the lack of responses to this thread.
1) Here in Texas there are no annual fees so it wouldn't matter when you file. I am not sure in your state.
2) Of course in all legal matters getting an attorney is always recommendable. With that being said doing yourself or through other means suffice but with risk of maybe done incorrectly.
3) I think having a PO Box or other paid address is worth it for privacy.
I am not familiar with Kentucky, but in Arizona it is pretty easy to set up an LLC yourself by following the instructions online and submitting your own forms. Certainly under $100 even if you have to advertise it in a newspaper to finish the process. In Az I don't think there is even an annual fee for LLCs. The most difficult part of setting up an LLC is creating an Operating Agreement which details the rules by which the LLC will operate, and if there are Partners who has what authority, and how assets will be distributed when winding up the LLC etc. For that it is useful to have a template from another LLC to start with. Personally I wouldn't pay a lawyer to set it up. But do check the fees etc for an LLC in your state. It might be different there.
@Mark S. I would advise just not bothering with an LLC period but if you are investing with others as in a partnership then that maybe your best route.
1.) This is a question best for your tax professional.
2.) I would not use any online service since they are not equipped IMO with handling REI issues. You can also set one up through KY yourself for I think around $45 or so however you might set up improperly to handle your REI purposes.
3.) @Allison H. is right on this is just up to your personal preference. If someone truly wanted to figure out the owner of the property there isn't much you can do about it since your name is probably associated somewhere. If you want to get into the legal part of it that is a question for your lawyer.
This is a question where you really need to get professional legal advice on. It isn't simply a legal or a tax question, but a combination of both. While you may be able to set up an LLC without an attorney, that does not ensure you are doing things like legal compliance correct, which may harm you down the line. Nor does it assure you are maximizing your tax estate. Start smart, get professional help.
If you aren't investing until January you can take the time now to consult an attorney & tax professional (preferably one who owns real estate &/or works with real estate investors). Even if you decide to do it yourself or use LegalZoom, you should still consult an attorney & tax pro first. Setting it up wrong will cost you more later.
@Jim Wilcox , thanks for responding. It would be syndication, so I would feel better having that other layer of protection (whether I truly need it or it just helps me sleep at night). You're also right about the privacy issue. If someone can see you tied to the property (via looking up members of the LLC), then they can certainly run your last name and find your personal address, too. Since that's the case, the UPS box is probably unnecessary; if they want to find you, they will. Most people are probably too lazy to go through the trouble, but if they go that far, a UPS box isn't going to help with total privacy IMO. This is the conclusion I came to after thinking about it for a while any way.
@Matthew Kreitzer and @James Hull , thanks for your feedback. I have decided to let my attorney create the LLC and figure it's worth the extra few dollars. Plus, let's say I did use a service like LegalZoom (and I know they have upgraded packages, but let's assume I use the basic one) and I got sued, I would feel silly running to my attorney for advice (who I initially consulted and didn't end up using because LegalZoom saved me a few bucks). Just doesn't seem to make sense.
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John Anderson , yes, I thought that went without saying. I will definitely be getting an umbrella in addition to everything else.
I'm new to Real Estate Investing as well... haven't setup an LLC yet. Every mentor and or coach I've met at my local REIA tells me to get a few deals first (I'm wholesaling fist to build up some confidence, capital etc.) then I'll do an LLC etc.
I went a few weeks ago to do some marketing to get some leads got a few calls my first appointment tomorrow I'm going to try and get this deal closed... do it a few more times then get my LLC etc.
Good luck !!
@LaPorsha Edmun you don't need an LLC to invest in real estate.
@Jim Wilcox correct! That's what I was saying to answer his question about getting an LLC right now when he just got started in REI. You don't need one.... I'm getting one later on after I do a few more deals.
BTW: In Calif & Nev, a PO BOX can not be used to file for the entity. In addition, you need a 3rd party to be the Registered Agent for service of legal actions. Privacy is dubious at best.
The whole purpose of an entity associated with REI is to segregate your personal assets (aka home) from your business activities and limit your personal liability; NO to shield or hide your identity.
@LaPorsha Edmun Guess I should have been clearer on my response. You say you are getting an LLC after a few deals but what is the "why" and the reason for doing so? For example, I personally own everything in my own name no LLCs at all. I don't foresee the advantage of having an LLC, at this time, but there are scenarios where it would make more sense. What @Mark S. is suggesting could be one of those examples. Having an LLC or to not have one is a hotly debated topic all over this forum. There are several articles in the blog as well that go over this. However, I can say from my experience that once many LLs that have set up an LLC, wish they had not bothered later on in their investing careers.
@Jim Wilcox the Why is because what i eventually want to do like REO's etc. alot of times you cant get these in your name you have to have an LLC and also ive been reading this book about being invisible as far as assets etc. I dont want everything all shown etc. I know you can get up to 10 mortgages in your name etc. but it would be a cap on stuff like that. It would depend on your overall real estate investing goals as well eventually I want to invest all over the country and all that property will not be in my name but in an LLC and other DBA's for marketing purposes etc.
For $500 and minimal annual fee, it seems like a very inexpensive layer of protection. It could cause some issues with lenders, in terms of needing a personal guarantee, but this seems like not such a big deal. Also, it'd be in addition to an umbrella policy. Have all properties in your individual name, like @Jim Wilcox mentioned, seems pretty risky to me. Having the ability to have these owned by an LLC would seem to allow one to better sleep at night. I'm still a rookie and he definitely has more experience, but I wouldn't want mine set up that way if at all possible. I guess everyone just has their own personal preferences. I'd rather spend a few extra dollars unnecessarily and not have needed to than the other way around. If it becomes that big of a hassle later, just transfer properties out of it and dissolve it, right?
@LaPorsha Edmun I have no knowledge of where you could have trouble buying an REO property with your personal name over an LLC. IMO a lender is more likely to want to finance a property over an LLC in most cases. Most REOs are pushed to the MLS or auction anyway at least around here. It could be different in your part of the county but as for KY I don't see that being the case.
LLCs can give you a level of asset protection but not necessarily identity protection. I good lawyer should be able to pierce that veil of an LLC if they know what they are doing and it is to their benefit to do so.
Here is a general overview from both sides. BP love lol!
Yes there is a 10 property limit to Fannie Mae properties. There are plenty of ways around this though.
Like it has been said time and time again it is ultimately up to the individual if they want to use an LLC or not. With of goal of wanting to be spread across the country that might be the correct platform but that is a really a question for your lawyer and CPA. LLCs are set up differently all across the country. They both need to be on the same page and familiar with the local laws of where you are investing. Good luck on all your future REI ventures and remember to take action!
@Mark S. you are correct that KY offers some of the cheapest and easiest fees for acquiring and maintaining an LLC. Many other states are way more expensive. There are other costs associated with the LLC but that is something your CPA would have to address. Also some umbrella policies do not provide coverage for LLC properties that once again lol a question for your insurance professional to make sure you are covered.
You have hit the nail on the head. It is all about personal risk and being able to "sleep at night." I personally sleep very well lol. Experience is relative and with BP at your fingertips there isn't much you would not be able to handle in the REI world.
This other BP article goes over my personal investing strategy of buying in your own name. With all investing there are always risks though. You just need to manage those risks.
Transferring properties out of an LLC to another or back into your name could pose your triggering the "due on sale clause" which is probably something you would not want to do. You should get in writing from your lender about doing that if that is something you would want to do in the future. They probably would not like it though.
I would not let the whole LLC debate keep you form REI though. It can all work itself out. Have an open conversation with your CPA and lawyer and see what platform works best for you personally. Good luck and remember to take that action!
I am a CPA and have a practice that has done work for hundreds of real estate investors for 13 years. Setting up a SM LLC to be a partner in an investment LLC is a great strategy if you have several million dollars of wealth and have a lot of assets at stake. If you train your tenants right, the risk of them trying to create legal hassles diminishes greatly. I know this because my wife and I have owned and operated a string of residential and commercial properties for 12 years in NJ and once upon a time in Texas, too.
Don't wait till next year to save a couple bucks. Those bucks are your tax deduction. More to the point, do little tasks now, because once you buy in to the LLC and purchases being, you;re life is gonna way way busier than it is now, so knock out smaller easy tasks while you have the time. If you still have fear about being sued, dont worry. Many people are afraid of that. But remember that the letters in FEAR stand for False Evidence Appearing Real. The way to beat this is by the 5 P's of the Marines: Prior Planning Prevents Poor Performance. Eliminate riisks. For example, as I have posted to other BP posts, screen, screen screen and then train in detail, fairly and consistently. For example, we tell new tenants to allow 45 minutes at move in to go over the lease. I read and explain every item on every page, and we both initial each page. Then if theres a problem, I send them a copy of the applicable page, highlighted along with a letter (certify, by the way) addressing the matter. You could also consider an umbrella policy, which are not expensive, wither.
Last, I pay an attorney to form an LLC> There is a state filing, there is a Federal filing, then there may be a state registration such as we have in NJ. Then theres the operating agreement. I have seen online companies that do not do all of these. An experienced attorney will. You will pay more, but you get what you pay for! Plus the costs is tax deductible as well.
Jim Kennedy, CPA
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