Question about investing under current LLC

[Robyn Cerone]

I am currently working as a Texas Notary Public, loan signing agent, and as such have already established an LLC for tax purposes. I am wondering if I need to set up a new LLC for Real Estate investing or can I use my current LLC. This is not a difficult thing to do here in Texas, you don't need an attorney to set it up for you, just need to fill out the appropriate paperwork, pay the fee, and file with the Secretary of State office. The current name I am using is not really appropriate for investing purposes, so thought about registering a DBA name with it as well in order to do my investing. Any advice would be appreciated.

[Mike S.]

Just creating an LLC by filing the document with the state is easy but does not mean that you have asset protection. What matter is the operating agreement. An operating agreement should be tailored for your activity. That is were a good attorney is needed, especially for asset protection.

For asset protection, you don't want to put all your eggs in the same basket as in case of judgement against your real estate property they will now have access to your other income.

LLC can have different tax status. It is very probable that an LLC for an active business won't need the same tax treatment as an LLC for passive investment.

An LLC can also be member or manager managed, single or multi-member. Each has its pro and con depending on your activity.

Last, if you seek anonymity (either to avoid some problems with tenants; or as one of your layer of asset protection), the LLC needs to be opened with that in mind. It is probably not the case for a loan agent.

So yes, it is very likely that you would need another LLC for your activity.

But please consult with an attorney to discuss your specific situation as there may be many other factors you need to take into consideration. Also you need to project yourself in the future to create a structure that will grow with you and won't need to be completely redone every few years down the road.

Most asset protection attorneys offer a free initial phone consultation to discuss your situation and give you a roadmap of what you may need. Make sure that the firm you talk to is also competent in tax optimization as the structure needs to meet both asset protection and tax optimization at the same time.

[Robyn Cerone]

Thank you Mike!

[Jason Marino]

Hi Robyn,

I agree with what was said in the post above. You can create an LLC at a low price by yourself. However, all that you will have if you choose this option is an empty entity that does not have all of the documentation that it needs to function or provide asset protection. Based on all of the considerations that should go into creating an entity, the issue is best addressed by having a conversation with an attorney who can understand what your current situation is and what your goals are.

[Robyn Cerone]

Thank you, Jason, I will for sure look for a real estate attorney here in San Antonio and see if I can get a consultation set up. I'm not sure I really need all of that documentation to be a notary,  but I for sure want to make sure everything is handled correctly once I start investing, especially with other people's money. Thanks again!!

[Eliott Elias]

Doesn't matter what you use, a simple LLC will not protect you in a lawsuit. You want to put it in a separate LLC to organize your expenses

[Nathan Gesner]

Quote from @Robyn Cerone:

You don't need an LLC at all.

An LLC is useful for two things: anonymity and legal protection. In most cases, neither is warranted.

Warning: I am not an attorney and this can be a complicated topic. Please note the information provided below is a layman's definition designed to provide a basic understanding for the general audience. You should consult an attorney or CPA for your specific situation.

ANONYMITY: When you create the LLC, your name is recorded on the documents and published on the Secretary of State website for all to see. So you're not completely anonymous. If you want to be completely anonymous, you can use a Registered Agent. The Registered Agent will record the documents on your behalf so only their name and information appears on the documents. I've done this with my properties because I'm well known in my small town and don't want people to know what I own.

LEGAL PROTECTION: By placing your assets in an LLC, you are legally separating them from your personal assets. If someone injures themselves and sues, they will be suing the LLC and not you personally. If your insurance coverage isn't enough, they could seize the LLC assets, but not your personal assets.

Additional thoughts:

1. An LLC is not free. You can spend as little as $100 to form an LLC, or you could use an attorney and spend $1,000 or more. There are also additional costs of operating and maintaining an LLC, like separate bank accounts, annual report filings, tax filings, etc.

2. There are rules to follow! If you fail to follow the rules, you may open your personal assets to a lawsuit. An example of this would be mixing your personal money and LLC money in the same bank account.

3. You do not need a separate LLC for each property or a series LLC! Don't make your life more complicated than it has to be. Most professionals will recommend a separate LLC for every $1 million in assets but I don't think that's necessary. In my case, I have residential rentals in one LLC, commercial properties in another, self storage in a third, and my real estate company operates in a fourth. Some have more than $1 million in equity while others have less.

4. The need for an LLC is grossly exaggerated on BiggerPockets and other websites. Have you ever heard of a Landlord being sued by a Tenant and losing property? I've been on this board since 2010 and haven't found an example yet. You've probably heard of big Landlords losing property, but only because they were flagrantly violating Fair Housing, running a slum, or otherwise violating the law in an egregious manner. You are more likely to be struck by lightning twice. The vast majority of lawsuits against Landlords are for wrongful eviction, security deposit disputes, and Fair Housing Violations. Your basic insurance policy with $300,000 in liability coverage should be sufficient in 99.999% of all lawsuits.

5. The best protection for you and your investments? Know and obey the law. I manage around 400 rentals with 12 years experience and have never been sued once. Even if I were sued, I document everything and obey the law, so I won't be found guilty. Even if I were found guilty, the cost would be in the thousands, not in the millions. Insurance would cover it, I would pay the deductible, and no assets would be lost.

If you are in an area like San Diego where people are more likely to sue, a judge is more likely to find you guilty, and the payout is likely to be higher, then you may consider an umbrella insurance policy. This policy will provide additional coverage above what your existing policy covers. It's easy to obtain, costs very little, and doesn't require additional, on-going effort to maintain.

[Robyn Cerone]

Nathan, great information! Thank you for your response. I am just getting started in real estate investing. Just dipping my toe in so to speak. But I am the kind of person who tends to be a little OCD about things like this. Want to be sure I'm doing everything properly from the get-go from getting an LLC set up properly to obtaining the correct insurance. I have every intention of following the law to the t. Can you tell me, what type of insurance you obtained to operate your businesses? I currently have a $500,000 policy for E&O missions for my notary practice. Would I need to obtain something similar as a real estate investor? I'm sure the real estate attorney could direct me in this area, but I was just curious. Thanks

[John Mocker]

Robyn

Just a note from an insurance perspective. Some companies that allow their personal lines forms (dwelling/fire) to cover an LLC, will ask if that LLC is used for any other business. Since the personal forms are generally less expensive and may be covered by your Umbrella, I would suggest that you discuss it with your agent.