Do I need to start an LLC or do it under myself?

18 Replies

Hello,

I'm considering getting the PRO account, but this brings up the question, how do I manage my finances related to Real Estate?

I will need to keep track of all my expenses, profits etc. But is it easier come tax time if I have a separate LLC or to do it all under myself?

With the LLC you just have to file the schedule with your other tax documents. Not Much of a hassle, especially if your keeping close tabs on everything

Get something like Quickbooks to track your expenses and income, your tax guy might even give you a deal if you have everything ready for him at the end of the year. 

If you do decide to get an LLC, make sure not to commingle your funds between business/personal expenses and income. Depending on what type of investing you do, having an LLC or an S Corp might protect you from a higher tax burden than just reporting all of the income under your own name. Some food for though. I'd talk with your tax preparer during the off season, they might sit down for free with you and give you some advice for moving forward. In my jurisdiction you can have your CPA set up your LLC for you all in one shot.

@Eduardo C.

Get an LLC once you are ready to buy a property. I have one for each property. The debate is endless here on BP on what is the best strategy, I'd just pick one and go.

Bear in mind that they do cost money. I spend about $250/year for each LLC I have in VT. While there is no yearly fee, the "minimum tax" that an LLC pays in VT is $250. So even with all the profit/loss passing through, we still pay $250 to maintain the LLC's status.

I would do a separate LLC. It costs as little as 50 dollars. That's in my state of Colorado. You can keep track of all your expenses on a simple spreadsheet. I attached an example down below

Originally posted by @Aaron Montague :

@Eduardo C.

Get an LLC once you are ready to buy a property. I have one for each property. The debate is endless here on BP on what is the best strategy, I'd just pick one and go.

Bear in mind that they do cost money. I spend about $250/year for each LLC I have in VT. While there is no yearly fee, the "minimum tax" that an LLC pays in VT is $250. So even with all the profit/loss passing through, we still pay $250 to maintain the LLC's status.

I find it interesting you do a separate LLC for each property. What is the reasoning behind this?

I am new as well and I set up an LLC a year ago. Same question why separate LLC for each property?

Many people will suggest to skip the LLC process and just get an umbrella insurance policy until you hit a certain number of rentals. This is the route that I am taking as I am in contract right now to purchase my first one. I would search the site for "Due on sale clause" and you will find a lot of information regarding LLCs and transferring titles post-purchase.

Everything under one LLC is fair game for creditors of that LLC. If you put all assets under a single LLC, then a creditor against one is a creditor against them all. If you put them under separate LLCs, then all a creditor can do is collect from the LLC against which he has a claim. This assumes that you have not commingled assets between LLCs and that you respected the corporate form. If you keep separate books and you run things properly, this is easy.

Think of it this way: an LLC is like a basket of eggs. A creditor can only take what's in the basket. If you put 12 eggs in the basket, a creditor can take any of the eggs or potentially all of the eggs. If you put only one egg in the basket, a creditor can take only that egg. You're limiting your potential liability to whatever you put into the basket. If you want to put everything you own into the basket, then don't have any LLCs. If you want to put all your properties into the basket, put them all under the same LLC. If you want to protect your assets, you put each property into a separate LLC.

Medium tb logo 130211 finalJonathan Twombly JD, Two Bridges Asset Management LLC | [email protected] | http://www.twobridgesmgmt.com | Podcast Guest on Show #172

The main reason I have separate LLCs is that one of my money partners is a Lawyer and he wants it that way :)
1. Lawyer
2. Cash

I have a personal umbrella protection policy as well.

@Ming Yu

@Eduardo C.

Search "separate LLC" here on BP and you'll find reams of debate on the matter.

I just posted this in another thread.

The LLC debate rages on here at BP. Rarely does a day pass without an investor asking whether they should use an LLC or not. Perhaps BP should have a whole forum just devoted to this question . . .

Having an LLC is a no-brainer. Real estate is a business, and if you are in business you should not be operating in your own name -- unless the law requires it, such as for certain professionals like lawyers and doctors who society feels should not have their professional liability limited. My knowledge is not exhaustive here, but I am unaware of any jurisdiction that requires you to own investment real estate in your own name.

People are confused because they get a lot of bad advice about LLCs -- what they can and cannot do. They are told -- wrongly in my view -- that they should not bother with LLCs because an LLC will not protect them from liability to a lender or because insurance does the same thing. I will expose the incorrect thinking below.

But first, let's discuss what an LLC actually is. A Limited Liability Company is a corporate form with a separate legal identity. As the name implies, it limits your liability to the value of the asset. It does not eliminate your liability, so when people say you should not bother with an LLC because it does not eliminate all liability, they are confusing the issue. An LLC provides important liability limitation and risk-management capability, and if you are in business you should be taking advantage.

It is true that lenders won't lend to an LLC with no history. If you are new, and the LLC does not have a proven cash flow, a lender will make you sign on the debt yourself. But you should still organize your business in a corporate form, like an LLC. Why? Because banks are not your only potential creditors. Who else is out there? Practically the entire world is a potential creditor. Tenants, vendors, guests of tenants, the mailman, UPS, the cable guy -- in other words, anyone who ever sells anything to the property or sets foot on it is a potential creditor. (Anyone who sets foot on the property is a potential creditor if they slip and fall on the property -- or if they claim they slipped and fell even if they did not.) If the property is owned by an LLC that you own, the LLC is the debtor. If you own the property directly, YOU are the debtor. If an LLC owns the property, the worst the creditor can do to you is take the property. If you own the property, and the property is not worth enough to satisfy the judgment, then the creditor will take the property AND THEN go after your personal assets -- that means your house, your car, your 401(k), your children's 529 plan, your baseball card collection, your monthly paycheck.

Insurance is another must, but it does not replace an LLC. If you have insurance, that's great. It will cover what's in the insurance contract, up to the coverage limit. But insurance does not cover it when you don't pay a vendor. And what if someone is injured on your property and the court awards more than the insurance coverage? If you have an LLC, they may try to go after your assets, but they won't be successful if you have run the business properly. If you own the property in your own name, then you should re-read the previous paragraph about your house, your car, your 401(k), etc.

A very important note about LLCs is, as I said above, that they are separate legal entities. To get LLC protection against creditors, you must respect the separate legal entity. You must IGNORE the advice that some real estate gurus give, which is to run a whole bunch of personal expenses through the LLC. THIS IS THE ABSOLUTE WORST THING YOU COULD POSSIBLY DO. Will it save you some taxes? Maybe, if you don't get audited. Will it destroy the limited liability protection and expose your personal assets to seizure by creditors? Absolutely.

The biggest complaint against LLCs is that they cost money. Yes, you need to file tax returns for them. Yes, you need to do proper accounting. All this is true. These are all costs of doing business. But, remember, this is a business. You are not in real estate for a hobby. This is where the big boys and girls play. If you are not willing to spend a couple hundred dollars a year on LLC costs, you probably should not be in this business at all. But the real question is: Would you rather have the couple hundred dollars extra each year or the peace of mind knowing that your and your family's personal assets are not exposed because you decided to buy an investment property? That choice is up to you, but to me the answer is obvious.

Medium tb logo 130211 finalJonathan Twombly JD, Two Bridges Asset Management LLC | [email protected] | http://www.twobridgesmgmt.com | Podcast Guest on Show #172

as a direct answer to your questions, it is "easier" without the llc.

Noted and a property to one LLC? Or all investment properties into one LLC?

@Jennifer Griffin I see that you have security deposits listed under income. You dont count sec deps as income I hope? 

@Rob Beland- We only count the deposit as income at the end of their lease, if we have to keep money for repairs and damages. 

Most of my clients and myself included use both LLC's and Umbrella policies to protect themselves. It can be a major hassle to collect rents for numerous different LLC's. What I have seen is investors have a few properties under each LLC. The scenario that they are trying to prevent by having multiple LLC's, is if a person is injured or killed on their property and they are found liable, they can only come after the LLC and whatever properties are under that LLC. The umbrella policy is a great Idea to give yourself a layer of protection of say $2million to $5 million.

One other note on this matter, if you have a lawyer set up the LLC, which I would recommend because they will advise you on how to not screw up this legal protection, make sure they are only charging you a few hundred at most to do so. I have seen lawyers charge as much as $1500 to set up a LLC which seems like robbery.

Originally posted by @Jason Reed:

Most of my clients and myself included use both LLC's and Umbrella policies to protect themselves. It can be a major hassle to collect rents for numerous different LLC's. What I have seen is investors have a few properties under each LLC. The scenario that they are trying to prevent by having multiple LLC's, is if a person is injured or killed on their property and they are found liable, they can only come after the LLC and whatever properties are under that LLC. The umbrella policy is a great Idea to give yourself a layer of protection of say $2million to $5 million.

One other note on this matter, if you have a lawyer set up the LLC, which I would recommend because they will advise you on how to not screw up this legal protection, make sure they are only charging you a few hundred at most to do so. I have seen lawyers charge as much as $1500 to set up a LLC which seems like robbery.

Can I use a legal service like legal zoom to do so? Or is it best to try and find someone local to help me set it up?

Also, do I need to start working with an accountant to get everything setup?

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