Getting an LLC?

Question

Hi everyone,I'd like to get my ducks in a row and getting the LLC is one of those ducks.  ;-)I'm in CO and have another LLC for my real estate media business, and wonder if there is anything different I should be aware of for setting up  a second LLC for real estate investing.Does anyone have advice on:

a. Companies to use for this?b. OR, can I do it myself as I did for my RE media business?I spoke with one company that wanted me to pay hundreds of dollars just to set it up (get EIN, etc) and I thought that was a little overkill.But is it?Thank you!Tanya

Stuart Udis · Answer

@Tanya Maslach The operating agreement language will be drastically different for an LLC that owns/operates real estate compared to the operating agreement used for your media company. The operating agreement for a single member LLC that owns real estate will also be very different than operating agreements for multi-member LLC's that do the same. A well drafted operating agreement will address business planning above all else. That's the part most fail to realize. Also, if you intend on buying this property as a single member LLC you may not even require an EIN. You can treat the LLC as a disregarded entity and rely on your SS#. However I recommend speaking with your accountant/tax advisor before making this determination as this may differ depending on the individual and their objectives.

For now, there's nothing wrong with doing your homework but focus more of your time and energy on finding a quality property to purchase. You can always form the LLC once you are under contract and are confident you will be proceeding with the purchase through a novation. Just make your lender and title company are aware of your intentions for title/deed prep and loan underwriting purposes.

For now, there's nothing wrong with doing your homework but focus more of your time and energy on finding a quality property to purchase. You can always form the LLC once you are under contract and are confident you will be proceeding with the purchase through a novation. Just make your lender and title company are aware of your intentions for title/deed prep and loan underwriting purposes.

Nathan Gesner · Answer

Do you need an LLC? Or are you just setting one up because you heard someone say you should?

I believe you can set up an LLC yourself through the state website. Here's a checklist: https://www.sos.state.co.us/pubs/business/helpFiles/LLCCheck...

But before you put in the effort, I recommend you educate yourself on what an LLC can do for you, what it can't, and how much it will cost in money, time, and effort.

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's 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 appear 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 primary 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 14 years of 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 expected to be higher, 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 extra, on-going effort to maintain.

Jonathan Bock · Answer

Lots of LT court and smaller civil complaints but I learned a lot in the process about myself and the system.

Nathan Gesner · Answer

Do you know anyone that has been sued? I've been on BP for 15 years. I've asked many, many times. I have never come across a landlord that was sued for more than their insurance would cover.

Most lawsuits are security deposits disputes, limited to 3x the deposit amount.

It is rare for a landlord to be sued for something significant. When sued, the insurance company defends the landlord and can get the case dismissed or settled outside of court. Even if a lawsuit makes it to court and the landlord is found guilty, insurance will be enough to cover the cost. The only significant lawsuits you hear about are big landlords that violate the law egregiously, usually over a long period.

The likelihood of being sued and losing an amount that can't be covered by insurance is probably equal to being struck by lightning twice. Creating an LLC to protect you from a tenant lawsuit is like building a hardened bunker to protect you from a meteor strike.

Tanya Maslach · Answer

Hey Stuart - Thank you!  So valuable.Still a few terms in this response I'll need to research to understand them in a more "5th grader" mindset I'm in (vs the legal pro you are!).  ;-) But you did address a few big things I was wondering about:a. Whether this operating agreement is something I can do andb.  If I could move on a property first, and form the LLC after.Thank you.

Ashish Acharya · Answer

@Tanya Maslach Setting up a real estate LLC in Colorado is similar to your previous LLC. You can do it yourself through the Colorado Secretary of State website, saving costs by filing the Articles of Organization, getting an EIN from the IRS, and drafting an Operating Agreement. LLC formation services like LegalZoom or IncFile are available if you prefer assistance but want to avoid high fees. Ensure you keep separate bank accounts and records for liability protection. It is always advisable to consult with an attorney if you are serious about asset protection.This post does not create a CPA-Client relationship. The information contained in this post is not to be relied upon. Readers should seek professional advice.

Jonathan Bock · Answer

@Nathan Gesner

My only lawsuit while an owner was for a premises liability case.  The insurance company covered everything, they ended up settling.  They did not want to go to trial based on recent jury awards in my state.

Jonathan Bock · Answer

@Nathan Gesner

I love this I know you have to repost this about every day but it's great info!

Amazed you have never been sued rather impressive!

Benjamin Aaker · Answer

If it's a single-member LLC, I set them up myself. I used LegalZoom for the first one and do all the rest in the same fashion on my own. If there are any partners involved, get an attorney.

Drago Stanimirovic · Answer

Hi Tanya,

You’re on the right track, and setting up an LLC for real estate investing in Colorado isn’t too different from your experience with your real estate media business. You can use services like LegalZoom, ZenBusiness, or Rocket Lawyer if you want a company to handle the setup for you. These companies typically charge anywhere from $200 to $500, and they take care of the Articles of Organization, EIN, and operating agreement. While convenient, it’s not necessary to pay that much unless you want the hands-off approach.

Since you’ve already set up an LLC before, you can absolutely do it yourself again. You’d need to file the Articles of Organization with the Colorado Secretary of State (the cost is around $50), get an EIN from the IRS (which is free and can be done online), and possibly draft an operating agreement, which isn’t required in Colorado but is still a good idea. Also, make sure you check if any local licenses or permits are needed for real estate investing.

If you’re comfortable with the process, doing it yourself can save a lot of money. The paid services are useful if you want everything handled for you, but it’s not a necessity.

If you need further advice on structuring or financing your investments, feel free to ask!

Best,

Drago

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