Orlando, FL · Member since 2009 · 2k+ posts · 282 votes
I formed my LLC a few months ago using a service, and received the Articles and Operating Agreement by mail from them.
The service advised me to make the LLC "Manager Managed" (with myself as the manager), rather than "Member Managed", so I did. I told them I wasn't sure whether there would be any other members in the LLC, or just myself, and they said this didn't matter, that it could still be "Manager Managed", even if it was a single member LLC.
As it turns out, I need to keep the LLC with me as the only person in it, due to issues with the homeowner's insurance carriers in this area.
The operating agreement that I received from the LLC formation service has several places to be filled out and signed. It has one sheet where the members agree to elect a person as manager, and another sheet where all the members are supposed to be listed. However, there are no "members" in this LLC--there's just me, the manager.
Should I leave these pages blank, or fill in my name and put "manager" in parentheses, or try to find a different operating agreement that works for a single member LLC? The service keeps telling me that no one will ever see the operating agreement, but if I were ever sued, I wouldn't want to have to produce it in court and have the judge claim it was a sham because it was set up for multiple members, when it's actually a manager-managed LLC with only one person in it. Thanks.
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
16y
Hi, IMO, if many investors would simply learn to do what is required and stay out of trouble together with having an attitude of doing the right thing, they would never have anything to worry about in the first place. All of these doom and gloom protectionists are just full of crap. Books about, Oooo, when you get sued, and when your tenant breaks their leg on your porch, you'll lose everything if you don't buy my book!
I have been at this stuff longer than most everyone on here that speaks up regularly, I think Rich and I are the old guys at this. I can't speak for Rich, but I have never lost a lawsuit and was only threatend a couple times where it even got close to a real claim, buyt both fell apart on them. I know I have done more deals so putting that into perspective, the risk in the real estate business is fairly low if you mind your manners and try to do the right thing. And I think that most of you know from my rants and raves that I'm really not a guy that gets walked on either, but then I don't pull stuff on others either.
So, what is it that makes all of this hidding out such an issue? It's your imagination and war stories! If you're planning on robbing banks as a side line and want to hide out, put your properties in someone elses name that has a low risk level of going bankrupt or getting divorced!
No bank is going to use a due on sale clause to call a note due if you transfer a property from your name personnally to your closely held trust or LLC. If anyone thinks so, I'd like the circumstances....because that was not the issue if there ever was a loan called.
I know there are many attorneys on this site as well, so jump in here and tell us in anystate in the union where the due on sale clause was the basis for accelerating any note to maturiy arising from a transfer of the collateralized property from the borrower to his/her closely held trust or LLC.....anyone?
You guys can find due on sale clause issues here on BP, what the DOS clause is, and the purpose of this risk management tool.
The passive income generated in your LLC is allowed when you are not directly involved in the management of the LLC. If you are the manager as an individual and claim that your income is passive as a memebr of the LLC, that may very well be depending on how much money you claim as the manager and being retained by the LLC. But, if you are audited and the powers to be see your arrangement as a sham transaction to manipulate the income and your income as a manager is significantly less than what would be appropriate for the duties performed, then you may have a problem. There are many gray areas to assessing tax treatments of income passed from one entity to another with a closely held owner/member/manager. And if the IRS is getting the short end as they define it, not anyone on here, you'll need to be able to convince them.
Most people, from what I have seen on here, have started their LLCs from documents that they swiped from someone else, off the internet or copied from some other source. I would say that few have actually gone to a good attorney and had documents as well as a good business plan drwan up for their business. I would say that most have never been to court and had to defen their LLC structure, the Operating Agreement of had any experiences where they got caught with their pants down because they failed to do something in their LLC, so my point is that the risks fo actually having to do so are very low. To those you messed up and lost everything, you were not properly insured.
I had hoped that we were going to have an educational type thing on LLCs, Josh may still be working on that but I'm sure I heard something about it awhile back. LLCs should be designed for the specific business paln and needs of the Members, not filed as a means to hide your assets or CYA in the event you mess up.
In all LLCs you'll find that liabilities are limited to members in certain situations and that the manager is and can be personally liable, so appointing yourself as the manager may not be the best thing to do. As the manager and owing the interest in the LLC, should you become personally liable, the claim will come in the back door on you since part of your personal assets is the interest in the LLC. So what was accomplished there? There is no magic bullet for small closely held LLCs for your gross negligence or perform illegal acts.
I really wish some attorneys would chime in now and again to address issues that seem to be giving investors problems in various areas. If you value your business I hope those who have net seen an attorney and a good CPA will do so. There are just too many different issues flying around to say this is what you should do.....good luck, as always...Bill
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
16y
Hi, they put it in that status, most likely, to provde you with passive income. The page may have several lines for members, but they can be blank. The problem seems that you need to name a manager and doing so will most likely kill your passive income strategy. What you might consider is being a membe of that LLC and appointing another LLC as the manager. That means having two LLCs. Your managemnt LLC can direct the day to day business and earn very little in your active role. You should have other members in your management LLC. Maybe you could get with other investors in your area and join forces in this strategy to allow each managing member LLC manage other LLCs. I know it sounds very convaluded, and it is, but with one hat you own the property and with the other you manage it. Your management makes you active, so don't make very much! I'd suggest you sek advice with a CPA in your area as well as an attorney and get a coordintaed plan in place. Paying a little now is much cheaper than paying later on. Bill
Rental Property Investor · Baltimore, MD · Member since 2009 · 624 posts · 559 votes
16y
Also, I haven't been to a closing yet where I was selling a property and the title company didn't require a copy of my operating agreement to determine that myself or any partners were authorized to conduct business on behalf of the LLC.
The operating agreement is the only thing tying you as an individual to the entity and title companies can be very picky about who is authorized to sign.
Orlando, FL · Member since 2009 · 2k+ posts · 282 votes
16y
OK--I remember now. The reason the service advised using "manager-managed" was because your name doesn't appear on the state website as the owner/member, so they said it gives you more privacy.
SFR Investor · Orange County, CA · Member since 2009 · 1k+ posts · 1k+ votes
16y
Originally posted by Bienes Raices:
However, there are no "members" in this LLC--there's just me, the manager.
I don't think that is a correct statement. Your LLC does have a member, YOU. You are ALSO the designated manager. IOW, you, as the sole-member, appointed yourself as the manager.
If Florida (or which ever state you chose) is anything like California, they require either the LCC's member information OR the manager's information. By making yourself the manager, they no doubt have all your info, but they only know you're the manager, not the member. THAT info is in your operating agreement, which the state doesn't see.
Make sense now or did I confuse this even more? :goofy:
I've seen states that have very different websites. My home state for example will allow me to search for a persons name and it will pop up all LLC's that person's name appears on and their role in the creation of it. So weather or not you form one LLC to manage another or a "member-managed" LLC if I wanted to know the information the website would do the work for me, it would simply be up to me to put 2 and 2 together.
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
16y
Right Marcus! These companies that sell LLC docs and systems are telling people that you can "hide out" and provide privacy or hide assets, not so! You can be found. If I have a judgment against you and have the right to garnish wages or income, if I see that you are a Manager, that is an employment position, so off my letter goes to that entity. If that entity does not comply, it's a contempt issue. If you want to hide assets, don't own them! Bill
Orlando, FL · Member since 2009 · 2k+ posts · 282 votes
16y
I know that it won't hide assets--my hope was that it might discourage the annoying "are you the owner?" type applicants for the rental(s). I don't think most of them are sophisticated enough to go poking around to find out who the members of the LLC are, etc.
I guess I was confused by the difference between member and manager. It's obvious to me now that there needs to be at least one member.
I'm just going to fill out the operating agreement as best I can. I'll vote to elect myself manager, even though I'm the only one voting.
I'm still a little bit confused about the operating agreement. I've heard some people say that (if you are sued), the only requirement is that you have some kind of operating agreement, and that not commingling, etc. is the most important factor in keeping the corporate veil intact. Other people say that the judge will look at the quality of the OA.
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
16y
Don't forget to have Minutes of Meeting for your LLC, yes even with one person, as it will show that you are making every attempt to operate as a business and not individually. If it appears that you conduct business in a seat of your pants fashion and venture off doing anything you like without keeping to the structure of the LLC, you'll lose any advantage of the LLC and be personally liable for your actions. I suggest you get some local assistance to get your feet on the ground. Bill
Orlando, FL · Member since 2009 · 2k+ posts · 282 votes
16y
Originally posted by Financexaminer:
Don't forget to have Minutes of Meeting for your LLC, yes even with one person, as it will show that you are making every attempt to operate as a business and not individually. If it appears that you conduct business in a seat of your pants fashion and venture off doing anything you like without keeping to the structure of the LLC, you'll lose any advantage of the LLC and be personally liable for your actions. I suggest you get some local assistance to get your feet on the ground. Bill
Bill, I have been using a form called "consent to action without meeting" (from the NOLO LLC book), in lieu of having one person meetings with minutes. Although I haven't done anything with the LLC yet except to fund it and open a bank account. I do document everything.
As for the earlier post about having one LLC manage another LLC that generally is pertaining to liability and not privacy.
Thanks Marcus. Unfortunately, from what I understand, it's the law in Florida that you need to list your (real, not a P.O. box) address on the lease, so I've given up the idea of hiding where I live from the tenants.
SFR Investor · Orange County, CA · Member since 2009 · 1k+ posts · 1k+ votes
16y
Originally posted by Bienes Raices:
Unfortunately, from what I understand, it's the law in Florida that you need to list your (real, not a P.O. box) address on the lease, so I've given up the idea of hiding where I live from the tenants.
If Florida is anything like California, simply get a friend of yours to be your "manager". That's what I did. The State of California has no idea I'm the sole-member of my LLC. All they were provided in the Articles of Organization and Statement of Information are the name and address of my Resident Agent and the name and address of my "manager".
Your "manager" then signs EVERYTHING on behalf of your LLC. They sign the leases with your tenants. The address you must provide on the lease is that of your Resident Agent. That way, YOUR name and address remains off everything.
Investor · Mableton, GA · Member since 2009 · 1k+ posts · 465 votes
16y
I have two different LLC (A Wyoming LLC and Alabama one) both have me and my wife as members and I am the "managing member". You don't lose your passive income status if you are the managing member (At least according to my CPA). As for the insurance,I use two different insurance companies (Homeowners of America for my TX properties and American Modern Insurance Group for my Alabama properties). I was never questioned by any of them to that matter, and the only thing I would recommend is to list the LLC as "additional insured" so in case there is liability claim, both you and the LLC are protected.
Lastly, the most important thing to make all of it worthwhile is to record the property under the LLC name.
SFR Investor · Orange County, CA · Member since 2009 · 1k+ posts · 1k+ votes
16y
Originally posted by Eddie Ziv:
Lastly, the most important thing to make all of it worthwhile is to record the property under the LLC name.
We just did that recently and the one thing I don't like, from a privacy perspective, if that my wife and I are listed as Grantors on the recorded deed and searchable in county databases. Sure, it shows us granting the property to my LLC, but anyone with half a brain, i.e., anyone not holding public office, should be able to put 2 and 2 together and realize the grantors of the property and the member(s) of the LLC are one in the same.
Investor · Mableton, GA · Member since 2009 · 1k+ posts · 465 votes
16y
Originally posted by Mitch Kronowit:
Originally posted by Eddie Ziv:
Lastly, the most important thing to make all of it worthwhile is to record the property under the LLC name.
We just did that recently and the one thing I don't like, from a privacy perspective, if that my wife and I are listed as Grantors on the recorded deed and searchable in county databases. Sure, it shows us granting the property to my LLC, but anyone with half a brain, i.e., anyone not holding public office, should be able to put 2 and 2 together and realize the grantors of the property and the member(s) of the LLC are one in the same.
Any ideas how to muddy the waters, so to speak?
Mitch, from a legal perspective it really doesn't mean anything. I bought one of my properties in TX from an LLC entity. Does that mean that, that LLC belong to me? Some people do the opposite rout to refinance. The answer is No. Legally, once the property is granted to the LLC, the only obligation the original owner has is to the note holder, i.e. the mortgage company.
BTW, once you record the property in the name of the LLC (Or any other form of entity), theoretically, the mortgage holder can call it "Due on sale" and demand to pay the loan in full. However, this is very unlikely to happen as long as you pay your mortgage on time, especially in this economic environment.
SFR Investor · Orange County, CA · Member since 2009 · 1k+ posts · 1k+ votes
16y
Originally posted by Eddie Ziv:
Mitch, from a legal perspective it really doesn't mean anything. I bought one of my properties in TX from an LLC entity. Does that mean that, that LLC belong to me?
Stop sounding like my attorney, Eddie. :wink:
Yes, I understand that my LLC is now the legal owner of the property and as a member, I am no longer personally liable (within reason and let's not start that debate here). I was simply saying from a privacy perspective, I would prefer our names not to show up in a Grantor/Grantee search. Perhaps the property needs to be granted over to yet ANOTHER entity, but I'm not paying another $800 franchise fee to form another LLC in the People's Republic of California.
:badwords: :wowo:
Investor · Mableton, GA · Member since 2009 · 1k+ posts · 465 votes
16y
Mitch, I'm curious. Why do you have to form a CA entity? Couldn't you form a Wyoming or Nevada entity and transfer the property to that entity? If you are concern about privacy, those state provide the best protection.
SFR Investor · Orange County, CA · Member since 2009 · 1k+ posts · 1k+ votes
16y
Originally posted by Eddie Ziv:
Mitch, I'm curious. Why do you have to form a CA entity? Couldn't you form a Wyoming or Nevada entity and transfer the property to that entity? If you are concern about privacy, those state provide the best protection.
I formed a California LLC because our rental properties are in California. Any income earned in this state is subject to California taxes. There are many Californians who formed Nevada corporations and LLC's only to find they still have to pay the California franchise fee in order to register their entity here. Whoops! :blush:
And Nevada isn't any more private than California. My name and address isn't on ANY documents in the Secretary of State's office. Our privacy is being compromised by the county recorders office since they list our names in the Grantor index. Anybody doing a search of who owns our rental properties will find our LLC as the owner, but also that we granted the property over to that entity. Like I said, it only takes someone with a little intelligence and time to piece together the pieces and figure I, the Grantor, must also be the member of the LLC.
Unless there's more to the article somewhere, it basically say to use a P.O. Box or Private Mail Box so you're not giving out your home address to anyone. That's good advice, it's what I've been doing for almost a decade, and I highly recommend it.
But if anybody wants to go even further, almost obsessive about privacy, get a copy of "How to be Invisible" by J.J. Luna. Now most of us don't have to be as thorough as him (he was hunted by Spanish authorities for a while), but there is a lot of good info about keeping your home address hidden, how some private investigators found seemingly impossibly hidden people, and horror stories about people who didn't take some basic precautions.
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
16y
Hi, IMO, if many investors would simply learn to do what is required and stay out of trouble together with having an attitude of doing the right thing, they would never have anything to worry about in the first place. All of these doom and gloom protectionists are just full of crap. Books about, Oooo, when you get sued, and when your tenant breaks their leg on your porch, you'll lose everything if you don't buy my book!
I have been at this stuff longer than most everyone on here that speaks up regularly, I think Rich and I are the old guys at this. I can't speak for Rich, but I have never lost a lawsuit and was only threatend a couple times where it even got close to a real claim, buyt both fell apart on them. I know I have done more deals so putting that into perspective, the risk in the real estate business is fairly low if you mind your manners and try to do the right thing. And I think that most of you know from my rants and raves that I'm really not a guy that gets walked on either, but then I don't pull stuff on others either.
So, what is it that makes all of this hidding out such an issue? It's your imagination and war stories! If you're planning on robbing banks as a side line and want to hide out, put your properties in someone elses name that has a low risk level of going bankrupt or getting divorced!
No bank is going to use a due on sale clause to call a note due if you transfer a property from your name personnally to your closely held trust or LLC. If anyone thinks so, I'd like the circumstances....because that was not the issue if there ever was a loan called.
I know there are many attorneys on this site as well, so jump in here and tell us in anystate in the union where the due on sale clause was the basis for accelerating any note to maturiy arising from a transfer of the collateralized property from the borrower to his/her closely held trust or LLC.....anyone?
You guys can find due on sale clause issues here on BP, what the DOS clause is, and the purpose of this risk management tool.
The passive income generated in your LLC is allowed when you are not directly involved in the management of the LLC. If you are the manager as an individual and claim that your income is passive as a memebr of the LLC, that may very well be depending on how much money you claim as the manager and being retained by the LLC. But, if you are audited and the powers to be see your arrangement as a sham transaction to manipulate the income and your income as a manager is significantly less than what would be appropriate for the duties performed, then you may have a problem. There are many gray areas to assessing tax treatments of income passed from one entity to another with a closely held owner/member/manager. And if the IRS is getting the short end as they define it, not anyone on here, you'll need to be able to convince them.
Most people, from what I have seen on here, have started their LLCs from documents that they swiped from someone else, off the internet or copied from some other source. I would say that few have actually gone to a good attorney and had documents as well as a good business plan drwan up for their business. I would say that most have never been to court and had to defen their LLC structure, the Operating Agreement of had any experiences where they got caught with their pants down because they failed to do something in their LLC, so my point is that the risks fo actually having to do so are very low. To those you messed up and lost everything, you were not properly insured.
I had hoped that we were going to have an educational type thing on LLCs, Josh may still be working on that but I'm sure I heard something about it awhile back. LLCs should be designed for the specific business paln and needs of the Members, not filed as a means to hide your assets or CYA in the event you mess up.
In all LLCs you'll find that liabilities are limited to members in certain situations and that the manager is and can be personally liable, so appointing yourself as the manager may not be the best thing to do. As the manager and owing the interest in the LLC, should you become personally liable, the claim will come in the back door on you since part of your personal assets is the interest in the LLC. So what was accomplished there? There is no magic bullet for small closely held LLCs for your gross negligence or perform illegal acts.
I really wish some attorneys would chime in now and again to address issues that seem to be giving investors problems in various areas. If you value your business I hope those who have net seen an attorney and a good CPA will do so. There are just too many different issues flying around to say this is what you should do.....good luck, as always...Bill
Investor · Mableton, GA · Member since 2009 · 1k+ posts · 465 votes
16y
Originally posted by Financexaminer:
Most people, from what I have seen on here, have started their LLCs from documents that they swiped from someone else, off the internet or copied from some other source. I would say that few have actually gone to a good attorney and had documents as well as a good business plan drwan up for their business.
Bill. Although I agree with most of what you've said here, this particular observation, I'm not sure wher you get it from. I don't know if everyone here goes to a lawyer and pay thousands of dollar to process of forming an entity, but I personally don't really see the reason. There are services like Legalzoom.com who would do just that for the fraction of what attorney would cost. I don't see what's wrong with that.
SFR Investor · Orange County, CA · Member since 2009 · 1k+ posts · 1k+ votes
16y
Originally posted by Financexaminer:
So, what is it that makes all of this hidding out such an issue?
Bill, it's simply keeping business matters business, and personal matters private.
I don't care how good a business man you are or how upstanding you've been with all your business affairs, you never know when you might run across that one person you've ticked off and wants to settle things with you, personally, not through the courts. You may never have had a tenant you successfully and justifiably evicted show up on your doorstep, but it has happened to others!
Does it occur often? No, I don't believe so. But I rather keep my personal life needlessly private, than wish I had kept my personal info to myself, and didn't.
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
16y
Originally posted by Mitch Kronowit:
Originally posted by Financexaminer:
So, what is it that makes all of this hidding out such an issue?
Bill, it's simply keeping business matters business, and personal matters private.
I don't care how good a business man you are or how upstanding you've been with all your business affairs, you never know when you might run across that one person you've ticked off and wants to settle things with you, personally, not through the courts. You may never have had a tenant you successfully and justifiably evicted show up on your doorstep, but it has happened to others!
Does it occur often? No, I don't believe so. But I rather keep my personal life needlessly private, than wish I had kept my personal info to myself, and didn't.
LOL, Gee, I don't know how to answer that without sounding like some kind of bad a _ _! I understand your concerns, but if I run them off, they keep going, there have been a few... I think I make things pretty clear and they know they are in the wrong, and initially I don't get personal unless they really get into it. It will be easier with experience.
I don't think people really know what my business is by seeing that I own a company or see properties or loans that I have had or have. It's kind of hard to be in real estate and be in a position where you don't want people to know, I want them to know! I had one sitution that really involved some other issues. A guy had a private investigator dig me up. Guess he figured that if I had enought to go after, I also had enought to run him off too. Being know to have the capacity not only to defend yourself but also counter be can a great benefit too. But to each his own, good luck...
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
16y
Originally posted by Eddie Ziv:
Originally posted by Financexaminer:
Most people, from what I have seen on here, have started their LLCs from documents that they swiped from someone else, off the internet or copied from some other source. I would say that few have actually gone to a good attorney and had documents as well as a good business plan drwan up for their business.
Hi Eddie, my opiniojn came from all of the requests I get about very elementry aspects of forming LLCs, where they have the Articles of Organization and a blank form Operating Agreement, but don't know how to fill them out. There is nothing wrong with getting forms from legalzoom.com, but I don't think Robert, O.J.'s old attorney, sits down with folks and devises a tailor made Operating Agreement for them. Using canned forms to organize is ok, but there should be some thought in the Operating Agreement! Beyound that, I see alot of questions asking how to arrange a deal or set up an arrangement, most are simply done in a good Operating Agreement, but since there is very little experience (mostly a lack of confidence IMO not so much the lack of imagination), they can't get it to an agreement or cover it in the Operating Agreement in the first place. So, that was my jsutification for saying what I did, based on all the questions and even suggestions that I have read on various sites, not just BP.
I didn't just make a baseless statement, it's from observations and experience. Bill
Bill. Although I agree with most of what you've said here, this particular observation, I'm not sure wher you get it from. I don't know if everyone here goes to a lawyer and pay thousands of dollar to process of forming an entity, but I personally don't really see the reason. There are services like Legalzoom.com who would do just that for the fraction of what attorney would cost. I don't see what's wrong with that.