Should I open an LLC to start?

11 Replies

Hello,

My name is Lee and I am new to real estate investments. I purchased a program on real estate, rehab and flipping recently and one of the "perks" of the program was consultation/foot work for opening an LLC (I of course have to pay the applicable state fees).

However, in my introduction forum I got the impression that an LLC was unnecessary and maybe harmful to start with. (In addition to the impression that I should have never purchased the program, but that is beside the point)

Personally I like the idea of running a business, it makes me feel more accountable then investing as an individual which I feel leaves me more likely to be lazy or slack. I also have become frozen with fear at networking without a business name or "So and So investments" to introduce myself with. I don't know if this is a personal problem or excuse or this is business instincts saying I will not be taken seriously without a business structure in place.

Also I was under the impression that an LLC would help with liability issues and would be more likely to be funded by Hard money lenders and Gap funds. This is a very important aspect for me as I will be and can only be working with OPM. It was suggested by the program that I open the LLC before actually doing any business.

I am very conflicted now. Could I get some thoughts on the subject?

As always thank you so much for taking the time to read my post. I know all too well how precious time is and I appreciate you taking time out of your life to take interest in mine.

Sincerely,

Lee Nicole Salinis

@Account Closed

LLC s are a great vehicle and there is no reason not to have one. For starting out you just need basic one so 500 bucks or less should do it.

then when you move into states other than HI you just register as a foreign corp.. Most investors don't do this of course and may don't realize you need to . But all the same that is what I do personally.

I see you are relatively new here @Lee Salinis so welcome to BP.

The questions about LLCs is pretty complex with lots of different opinions. There are many threads here on the subject so a search may be helpful.

Personally I like the idea of running a business,

Keep in mind you are running a business whether you have an LLC or not. Have you heard the term "Sole Proprietor?" That is a business run by a person without a separate entity. You can have a name that is a DBA (Doing Business As) even if you are running the business as a sole proprietor. You get to deduct business expenses whether you run it as a sole proprietor or as a separate entity like an LLC or Corporation.

I also have become frozen with fear at networking without a business name

Some seller are intimidated by big companies and I have seen people be very successful with the approach of "My wife and I are looking to buy some rentals for our retirement" The seller feels comfortable dealing with a real person not some company that will take advantage of them.

Also I was under the impression that an LLC would help with liability issues

An LLC can be helpful to limit liability but it is by no means absolute protection. This gets to be a more in depth subject in itself. I think LLCs are a good idea and currently do all my business through several of them.

and would be more likely to be funded by Hard money lenders and Gap funds.

I don't think most hard money lender will care. In general it is harder to get funding with an LLC through traditional lenders.

In addition to reading here I suggest you check out NOLO Press. They have several good books on LLCs and there website itself is very helpful.

Good luck - Ned

An LLC is not what yo need as a beginner. First you need a business model and a market. Should your business model necessitate obtaining conforming mortgages for properties you want to acquire, an LLC is of no help. An LLC cannot apply for a mortgage. Ask other investors in HI how money can be earned as a novice investor where you live. I am sure you find some in these wonderful forums.

I agree with Andreas. I am new myself and have been conflicted with whether or not to start an LLC. Ultimately I have decided that I am not going to do that until down the road if necessary. I'd rather focus my attention on getting out there, finding deals, and learning.

@Christine Oliphant

the need for limited liability is directly related to your assets. as that is what your trying to protect. the other reason for LLC is for multiple partners you keep your LLC status without the formality of meetings like a corp.. And there can be uneven distributions unlike Corps were ditributions...

Thanks, Jay. Do you recommend an LLC to start with even if you don't have assets yet? And do you recommend it regardless of whether you buy and hold or wholesale/fix and flip?

A C.P.A. just told me don't worry about it until you have four or five properties. It's not worth the trouble. At four or five you want the tax advantages and the limited liability. And some umbrella insurance.

Hey @Account Closed and Welcome to BP. I think all your concerns are fair and quite reasonable.

I can say, positively, that Hard Money Lenders will definitely take you more seriously with an LLC. Some wont even consider working with an investor who isn't incorporated. Although hard money has less regulations than conventional loans- the gov. would rather us work with LLC's because businesses are seen as 'smarter' investors.

@RJ Bryan

RJ the other reason HML's want to lend to LLC and probably the main reason is over licensing issues. IE no license required for a commercial loan made to a company instead of a loan made to an individual that could be deemed Owner occ and therefore subject to the safe act.. As we know this varies in each and every state and depending on who you talk to.

@Christine Oliphant

In my mind if your going to create a bizzness and run with it.. you can set up an LLC right up front.. And you can usually get this done for 200 to 500 buckaroos.. ( simple LLC with a non complicated operating agreement) However umbrella insurance is cheap and is a must have if your going to be doing a lot of bizz in my mind... Single member LLC and you have a problem your still going to get named personally in any suit and your going to have to spend thousands trying to get your personal name removed from the case.

Insurance will defend you if you have the correct policy.. However look at this in a realistic fashion. If your starting out and have no assets in the bizz or personally your really not going to have any problems no one will spend thousands in attorney and court fee's to chase someone with no hope of collecting.. If you have insurance they will go after your insurance policy as that is were the money is...

Your liability in the act of buying and flipping a house is really quite small what is someone going to sue you for.. Unless you intentinally defrauded someone by lying about the condition of the home or something like that. But if your straight up what is anyone going to sue you for?

Originally posted by @Jay Hinrichs richs Hinrichs Hinrichs:

RJ the other reason HML's want to lend to LLC and probably the main reason is over licensing issues. IE no license required for a commercial loan made to a company instead of a loan made to an individual that could be deemed Owner occ and therefore subject to the safe act.. As we know this varies in each and every state and depending on who you talk to.

Your liability in the act of buying and flipping a house is really quite small what is someone going to sue you for.. Unless you intentinally defrauded someone by lying about the condition of the home or something like that. But if your straight up what is anyone going to sue you for?

All the hard money lenders I know will not lend to individuals, because of what Jay referenced above regarding the SAFE act. So if you are planning on using hard money, simply call some local HML's and ask them now, before you make your decision whether to form an LLC or not.

And "If you're straight up, what is anyone going to sue you for?" - Boy, I wish that were true. I'm aware of a couple of lawsuits right now where the premise of the suit is totally fabricated. However, deep pockets of the insurance companies is the biggest motivation. The suits are proceeding because the defendant is heavily insured. That doesn't mean don't get insurance. It just means that lawsuits move forward even when you've done nothing wrong.

Free eBook from BiggerPockets!

Ultimate Beginner's Guide Book Cover

Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks and techniques delivered straight to your inbox twice weekly!

  • Actionable advice for getting started,
  • Discover the 10 Most Lucrative Real Estate Niches,
  • Learn how to get started with or without money,
  • Explore Real-Life Strategies for Building Wealth,
  • And a LOT more.

Lock We hate spam just as much as you

Create Lasting Wealth Through Real Estate

Join the millions of people achieving financial freedom through the power of real estate investing

Start here