When is a good time to start an LLC?

Question

Hi everyone. I'm new to the real estate world but I'm in the posses of purchasing my first duplex. Because my main goal is to have many rental properties, should I start off my venture as a LLC or save the money for now and start as a sole proprietor?

Kelly Byrd · Answer

I think of an LLC a bit like a container: You buy things in the LLC so that things OUTSIDE the LLC are protected from the things inside the LLC. So, if you have two rental properties inside an LLC and someone sues over something related to one of these properties, in theory the lawsuit cannot reach outside the LLC and risk your other assets. But they could come after the other value of the property inside the LLC.

An LLC isn't a magic wand though. There are a few ways it can not work they way you expect. The typically example I've seen is that if you personally do some work on the property you are liable for the work you do. But, there are others. There are several posts on BP about LLCs vs umbrella insurance policies (another option, many people do both) reading those might give you some background. After that it might be helpful to book a 1-2hr consultation with asset protection attorney to get your questions answered.  As Nichole said, setting up a simple one shouldn't require an attorney, but you really should know the types of things it will and won't protect.

But, I see that you're a fellow Californian. One problem with LLCs and living in California is that each LLC will likely owe $800/year to the state. This is true even if the LLC and the properties are outside CA. The reason for this is that the CA State Tax folks have recently taken a more expansive view of the phrase "doing business in California". Now, an out-of-state LLC is considered "doing business in California" if it has at least one managing member living in California. Did you talk to a property manager company to sign an agreement to manage your property? Did you respond to the PM's email to approve a charge to repaint? You're probably considered managing member the LLC.  If you're at all unsure, talk to a tax advisor.

Nichole Stohler · Answer

@Vincent Ames, the benefit of an LLCs is that it also provides a form of protection.    Fairly simple to set up and inexpensive.