Fullerton, CA · Member since 2015 · 11 posts · 3 votes
Being new to Real Estate Investing, I'd like to mitigate my risk as much as possible out the gate. I decided to pull in a group of friends (none of us have a whole lot of money individually, but together we have more than enough money to get started.)
Something we're taking into serious consideration is the option to create an LLC to use as a means of acquiring property.
1) Is this a good idea?
2) Is there a way we can shape this LLC to be flexible towards other investments?
3) Is there a way to form this without shelling out to much money?
Rental Property Investor · Baltimore County Maryland and Tampa Florida · Member since 2013 · 2k+ posts · 2k+ votes
11y
You'll open the LLC in the state that you'll be purchasing properties. Even though you guys are across states, had you agreed upon one state to invest? That'd make it easier as far as deciding which state to open the LLC in.
If you open the LLC for say Nevada, but do business (own properties) in California, you'll have to pay foreign entity fees/tax...and that's pointless.
Next, you need a very good operating agreement for your LLC. It needs to spell everything out from what business you're doing, how you're taxed as a partnership, how much of the LLC each person owns, what happens if someone wants to leave the LLC, how the LLC is completely separate from you as individuals, etc.
It's some money up front, but for a truly strong LLC setup, I suggest you look up Al Aiello's LLC Mastermachine. Also research LLCs and their formalities. If you're not running the LLC properly, it will not protect you.
Investor · Leominster, MA · Member since 2011 · 1k+ posts · 589 votes
11y
With multiple people involved you definitely want to set up some separate entity but not necessarily an LLC. (LLC's were popular at one point but have been proven to be less attractive and "out of fashion" so to speak. An S-Corp is a good option since it's a pass through entity so there are no corporate taxes to pay (no double taxation). The income is disbursed by way of a K-1 and you are taxed based on your personal financial situation. You could also look at a Limited Liability Partnership. You really need to consult an attorney to help with the details of the corporate structure. What happens if one investor wants out or dies. Does a wife/husband inherit his/her interest in the property? Do you want his portion to be split among the remaining investors. Who is going to lead the charge so to speak? You may want to be the Managing Partner if you're doing the legwork.
You can go online and set up any corporation yourself for a couple hundred bucks if you feel like you're savvy enough to navigate the process and understand the process. Regardless of which one you choose you can continue to use it to purchase more properties. I would suggest calling an accountant and an attorney first.
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
11y
You'll find that an entity dealing out of state will be a foreign corporation which will need to be registered in each state you do business in.
One way would be to have a domestic corporation (LLC) that can have members made up of other domestic LLCs in other states, each of your friends would have their own LLC then that LLC would simply be a member of a "parent" managing entity.
I suggest that you use the money available first to set up a proper structure with an attorney, the DIY stuff off the internet accomplished by unaware newbies will usually be inefficient or improper or mismanaged as a result. At least get assistance from an accountant familiar with such matters. Don't be penny wise and pound foolish. Good luck :)
Contractor · Los Angeles, CA · Member since 2015 · 4k+ posts · 1k+ votes
11y
I am not sure nor am this is a legal advise. If you are going out of state, form a main corp where the resident agent is cheap (az, wyoming, delaware) , and mail forwarding service. Create bank accounts virtually for the entity (boa has this). the main thing is, it will hold all your properties, then you make one llc/corp to hold EACH investment (well, probably two). see an attorney, if there is too many people in an entity, there will be a lot of complications, like in case of death/disability/divorce, etc.
Rental Property Investor · Baltimore County Maryland and Tampa Florida · Member since 2013 · 2k+ posts · 2k+ votes
11y
You'll open the LLC in the state that you'll be purchasing properties. Even though you guys are across states, had you agreed upon one state to invest? That'd make it easier as far as deciding which state to open the LLC in.
If you open the LLC for say Nevada, but do business (own properties) in California, you'll have to pay foreign entity fees/tax...and that's pointless.
Next, you need a very good operating agreement for your LLC. It needs to spell everything out from what business you're doing, how you're taxed as a partnership, how much of the LLC each person owns, what happens if someone wants to leave the LLC, how the LLC is completely separate from you as individuals, etc.
It's some money up front, but for a truly strong LLC setup, I suggest you look up Al Aiello's LLC Mastermachine. Also research LLCs and their formalities. If you're not running the LLC properly, it will not protect you.