Totally lost on creating LLC
Phoenix, AZ · Member since 2019 · 33 posts · 12 votes
Totally lost on creating LLC
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Rental Property Investor · TX · Member since 2019 · 303 posts · 364 votes
7yWow! Lot's of misinformation here. Let me try to explain why you MUST have an LLC.
If you are a sole-proprietor (No LLC) and a tenant gets killed because of a faulty oven in your SFH rental, their estate/heirs will sue you for $10 million or more! They will take your rental, they will take all the money in your personal accounts, savings accounts, IRA's and 401k. They will take your vehicles, and then, depending on your state's homestead laws, they can take your personal residence. They will get a judgment against you for the rest. They will use Writ of Attachments and garnish your wages and you will work the rest of your life to pay them.
It the property were owned by an LLC, they could only sue the LLC and most likely all they could take is your SFH rental. (Assuming you do everything correctly and do not allow the corporate veil to be pierced.)
Here is another scenario where the LLC will help protect you:
If you are a sole-proprietor (no LLC) and a UPS driver slips on the wet lawn of your personal residence, hits his head on a rock and dies, his estate/heirs will sue you for $10 million or more! They will take all the money in your personal accounts, savings accounts, IRA's and 401k. They will take your vehicles, and then, depending on your state's homestead laws, they can take your personal residence. You know the rest. What you may have noticed is that they cannot take your SFH rental because the LLC owns it!
If the property were owned by an LLC, they could only sue you personally for your liability and most likely, all they could take is your personal stuff. (Still bad, but imagine if you had 50 rentals like @Arlan Potter. He would have lost all 50 of his properties!).
Sure insurance is great, but what if your policy was only $2 million max and you're sued for 10 million?
I recommend that you put your personal residence and other personal assets in trusts and LLCs as well. The reason you might use a Wyoming LLC or Nevada LLC to own an LLC in your own state is for anonymity. If someone wants to sue you, they'll never find everything you own.
@Stanley Bronstein posted that you are required to register your out-of-state LLC. This is NOT true for all states. Be sure to check with your state to see if this applies to you, and your particular situation.
31 Replies
- 7yPriya ThomasPro MemberInvestor · Cincinnati, OH · Member since 2017 · 135 posts · 61 votes
You should have LLC in the state where you hold your property for liability protection. Rest all myth and misinformation.
Also Ohio is cracking down on LLCs owning properties here but not registered in Ohio., Again, I am no expert. Consult a lawyer.
- Realtor / Attorney · Phoenix, AZ · Member since 2018 · 388 posts · 265 votes7y
Agreed that the LLC should be registered where the property is located for maximum asset protection. The reason Delaware LLCs are so popular is that they have business-friendly tax laws. This doesn't really help you with a property in Ohio. Most people also segregate each property they hold into a separate LLC (again, for liability purposes). So bear in mind that you will likely want to create a new one each time you add a property to your portfolio.
LLCs can be as simple or complicated as you make them. Most anyone can fill out the forms and pay the fee to the Secretary of State. If you have complicated assets or ownership structure, or other areas that need specific legal protections, its important to have an attorney set up an LLC that meets these specific needs.
Hope this helps!
- Real Estate Investor · Naperville, IL · Member since 2017 · 13 posts · 4 votes7y
Are you buying properties for yourself or is there more than one investor? If just you then I would NOT go the LLC route and just purchase additional insurance (business and personal umbrella). This will allow you to get better financing rather than go the commercial route. I own multiple properties in my own name and also own multiple within an LLC with my brothers.
In regards to the debt to income ratio, once you have the property rented it shouldn't be an issue as it will add to your income.
- Attorney, CPA, Broker & Author · Scottsdale, AZ · Member since 2018 · 532 posts · 488 votes7y
@Nate Fanara If you have an AZ LLC and you plan on owning Ohio income producing property, then you would need to also register it in Ohio. That's just double the work (and expense) and it defeats the purpose.
@Pamela Sandberg is correct. Use an Ohio LLC.
Delaware LLCs are typically only needed for big deals ($10 million on up) where the big lenders require you to use a Delaware LLC.
- Phoenix, AZ · Member since 2019 · 33 posts · 12 votes7y
Originally posted by @Pamela Sandberg:
Agreed that the LLC should be registered where the property is located for maximum asset protection. The reason Delaware LLCs are so popular is that they have business-friendly tax laws. This doesn't really help you with a property in Ohio. Most people also segregate each property they hold into a separate LLC (again, for liability purposes). So bear in mind that you will likely want to create a new one each time you add a property to your portfolio.
LLCs can be as simple or complicated as you make them. Most anyone can fill out the forms and pay the fee to the Secretary of State. If you have complicated assets or ownership structure, or other areas that need specific legal protections, its important to have an attorney set up an LLC that meets these specific needs.
Hope this helps!
Wouldn't i have to have a business bank account with each LLC then? This seems very exhausting, but perhaps worth it in the end.
- Phoenix, AZ · Member since 2019 · 33 posts · 12 votes7y
Originally posted by @Scott Nelson:
Are you buying properties for yourself or is there more than one investor? If just you then I would NOT go the LLC route and just purchase additional insurance (business and personal umbrella). This will allow you to get better financing rather than go the commercial route. I own multiple properties in my own name and also own multiple within an LLC with my brothers.
In regards to the debt to income ratio, once you have the property rented it shouldn't be an issue as it will add to your income.
yes it is just me and my wife. I wasn't sure if the income i generate from income generated from the property was enough to outweigh the debt tacked onto my credit.
- Realtor / Attorney · Phoenix, AZ · Member since 2018 · 388 posts · 265 votes7y
@Nate Fanara: Yes, a separate bank account will help you access all legal protections of the LLC (otherwise it could be argued that you aren't really acting as a separate business). It is a hassle, but a necessary step if you want the protection of a separate LLC.
If you were to put multiple properties in the same LLC, creditors could access equity in ANY of properties for debt on ANY of your properties. This puts more of your assets at risk (and is why investors do not favor this strategy).
- Real Estate Investor · Naperville, IL · Member since 2017 · 13 posts · 4 votes7y
Read this prior thread
- Investor/Accountant/Builder · Meno, OK · Member since 2014 · 1k+ posts · 918 votes7y
@Nate Fanara Don't waste your time with LLC's Until you start a real portfolio. We set up 3 LLCs when we started buying multifamily properties. One LLC for rental homes, one for apartments, one for commercial properties. We owned over 50 single family rentals before we got any LLCs Have good liability insurance and get to investing.
- Rental Property Investor · TX · Member since 2019 · 303 posts · 364 votes7y
Wow! Lot's of misinformation here. Let me try to explain why you MUST have an LLC.
If you are a sole-proprietor (No LLC) and a tenant gets killed because of a faulty oven in your SFH rental, their estate/heirs will sue you for $10 million or more! They will take your rental, they will take all the money in your personal accounts, savings accounts, IRA's and 401k. They will take your vehicles, and then, depending on your state's homestead laws, they can take your personal residence. They will get a judgment against you for the rest. They will use Writ of Attachments and garnish your wages and you will work the rest of your life to pay them.
It the property were owned by an LLC, they could only sue the LLC and most likely all they could take is your SFH rental. (Assuming you do everything correctly and do not allow the corporate veil to be pierced.)
Here is another scenario where the LLC will help protect you:
If you are a sole-proprietor (no LLC) and a UPS driver slips on the wet lawn of your personal residence, hits his head on a rock and dies, his estate/heirs will sue you for $10 million or more! They will take all the money in your personal accounts, savings accounts, IRA's and 401k. They will take your vehicles, and then, depending on your state's homestead laws, they can take your personal residence. You know the rest. What you may have noticed is that they cannot take your SFH rental because the LLC owns it!
If the property were owned by an LLC, they could only sue you personally for your liability and most likely, all they could take is your personal stuff. (Still bad, but imagine if you had 50 rentals like @Arlan Potter. He would have lost all 50 of his properties!).
Sure insurance is great, but what if your policy was only $2 million max and you're sued for 10 million?
I recommend that you put your personal residence and other personal assets in trusts and LLCs as well. The reason you might use a Wyoming LLC or Nevada LLC to own an LLC in your own state is for anonymity. If someone wants to sue you, they'll never find everything you own.
@Stanley Bronstein posted that you are required to register your out-of-state LLC. This is NOT true for all states. Be sure to check with your state to see if this applies to you, and your particular situation.
- Attorney, CPA, Broker & Author · Scottsdale, AZ · Member since 2018 · 532 posts · 488 votes7y
I recommend you consult a knowledgeable lawyer in the state where the property is located.
- Investor · Broward County, FL · Member since 2018 · 1k+ posts · 938 votes7y
LLC have two protection mechanism:
Inside protection: any liability happening inside the LLC is contained in the LLC (ie only the assets in the LLC are at risk and your personal assets are not).
Outside protection: if you have liability arising from a personal event, the assets in your LLC are protected if the charging order are the only remedy.
The first protection is the same in all state. The second one however depend on the state and some will allow foreclosure. Some state protection will also differ depending if it is a single member or multi member LLC.
That is why I am a proponent of using a double LLC structure.
The first LLC is opened in the state where the property is located. This LLC is then owned by a holding LLC in WY or NV. These two states not only offer good anonymity (one way to lower the risk of ambulance chaser lawsuits) but also have excellent charging order protection. By using this double layering, your local LLC is protected from outside threats thanks to the holding LLC.
Taxwise, the local LLC is disregarded and only the holding LLC will have to report (if multimember).
You keep one holding LLC and you open as many local LLC that you need (either one per state) or many in the same state if you have many properties that you want to insulate from each other.
Using LLC has a cost, but provide also great peace of mind. It is up to you to decide depending on your assets and your threat assessment what level of protection will make you sleep better at night. Only you can answer that.
- Attorney · Columbus, OH · Member since 2015 · 22 posts · 15 votes7y
Ohio attorney here...
The comments provided up to this point have been pretty spot on. Getting an LLC is one of the many mechanisms you can use to house your REI portfolio (pun intended) under Ohio law.
Don't think you need to house it in DE or NV. Both have some great benefits, sure. NV in particular has no state income tax, franchise tax or corporate tax, but I don't think at this juncture in your REI career DE or NV would truly serve the benefit you might think they'd offer you at this point.
Shoot me a message and we can talk in more detail about what your options under Ohio law might be.
Chris
- 7yMatthew Irish-JonesBusiness MemberReal Estate Agent · Buffalo, NY · Member since 2017 · 2k+ posts · 2k+ votes
@Nate Fanara. Having an LLC is going to change the type of loans you can get.
Make sure you understand that point before you go down that road.
Irish Jones Realty4.947 Reviews - Rental Property Investor · Brooklyn, NY · Member since 2014 · 722 posts · 1k+ votes7y
Originally posted by @Steve Hall:
Wow! Lot's of misinformation here. Let me try to explain why you MUST have an LLC.
If you are a sole-proprietor (No LLC) and a tenant gets killed because of a faulty oven in your SFH rental, their estate/heirs will sue you for $10 million or more! They will take your rental, they will take all the money in your personal accounts, savings accounts, IRA's and 401k. They will take your vehicles, and then, depending on your state's homestead laws, they can take your personal residence. They will get a judgment against you for the rest. They will use Writ of Attachments and garnish your wages and you will work the rest of your life to pay them.
It the property were owned by an LLC, they could only sue the LLC and most likely all they could take is your SFH rental. (Assuming you do everything correctly and do not allow the corporate veil to be pierced.)
Here is another scenario where the LLC will help protect you:
If you are a sole-proprietor (no LLC) and a UPS driver slips on the wet lawn of your personal residence, hits his head on a rock and dies, his estate/heirs will sue you for $10 million or more! They will take all the money in your personal accounts, savings accounts, IRA's and 401k. They will take your vehicles, and then, depending on your state's homestead laws, they can take your personal residence. You know the rest. What you may have noticed is that they cannot take your SFH rental because the LLC owns it!
If the property were owned by an LLC, they could only sue you personally for your liability and most likely, all they could take is your personal stuff. (Still bad, but imagine if you had 50 rentals like @Arlan Potter. He would have lost all 50 of his properties!).
Sure insurance is great, but what if your policy was only $2 million max and you're sued for 10 million?
I recommend that you put your personal residence and other personal assets in trusts and LLCs as well. The reason you might use a Wyoming LLC or Nevada LLC to own an LLC in your own state is for anonymity. If someone wants to sue you, they'll never find everything you own.
@Stanley Bronstein posted that you are required to register your out-of-state LLC. This is NOT true for all states. Be sure to check with your state to see if this applies to you, and your particular situation.
Great post. You forgot one more dumb scenario from the penny-wise and pound-foolish, which is sticking all their properties under one LLC.
Everything under the roof of a single LLC is reachable by a creditor of the LLC. So the more you stick under one LLC, the more vulnerable you make yourself.
Chances are, if you have built up anything of a portfolio, it constitutes the bulk of your net worth. There's little of value to protect outside the LLC other than your home. So sticking all your real estate under one LLC makes almost as little sense as having no LLCs at all.
There must be some guru out there telling people they only need insurance, or to stick all their RE under a single LLC, because the myth that insurance is enough persists on BP. I've been fighting this battle for years, since the days of Joe Gore, who got banned for repeatedly posting that LLCs were worthless and all you need is insurance.
I’m also willing to bet that the people who are too cheap to structure their businesses properly are also too cheap to buy good insurance. They are probably very under insured and have bad insurance policies from companies known for disputing all claims. So they’re going to find themselves in a world of hurt.
However, there is a very Darwinian solution here: let the anti-LLCers structure things the way they want. And let the rest of us buy their assets in liquidation sales.
- Attorney · Columbus, OH · Member since 2015 · 22 posts · 15 votes7y
Originally posted by @Jonathan Twombly:
Great post. You forgot one more dumb scenario from the penny-wise and pound-foolish, which is sticking all their properties under one LLC.
Everything under the roof of a single LLC is reachable by a creditor of the LLC. So the more you stick under one LLC, the more vulnerable you make yourself.
Chances are, if you have built up anything of a portfolio, it constitutes the bulk of your net worth. There's little of value to protect outside the LLC other than your home. So sticking all your real estate under one LLC makes almost as little sense as having no LLCs at all.
There must be some guru out there telling people they only need insurance, or to stick all their RE under a single LLC, because the myth that insurance is enough persists on BP. I've been fighting this battle for years, since the days of Joe Gore, who got banned for repeatedly posting that LLCs were worthless and all you need is insurance.
I’m also willing to bet that the people who are too cheap to structure their businesses properly are also too cheap to buy good insurance. They are probably very under insured and have bad insurance policies from companies known for disputing all claims. So they’re going to find themselves in a world of hurt.
However, there is a very Darwinian solution here: let the anti-LLCers structure things the way they want. And let the rest of us buy their assets in liquidation sales.
I agree with you in almost every respect. I don't always recommend putting each property under its own separate LLC. If you are expanding your portfolio and each property is under a separate LLC it can quickly become confusing and less advantageous from an accounting and legal perspective. The confusion could leave an investor unknowingly piercing the corporate veil for misuse or commingling of funds from separate entities (i.e. mistakenly using one LLCs account to make payments for another). Two ways I have seen around this...
1) Have a financial threshold for each entity. Say you are investing in $30,000 SFRs that you rehab and rent out. Once that portfolio has an asset value of $120,000-150,000 (add the ARV of each property) you form a new entity for the next acquisition(s). This limits accounting issues and also allows you to carry loss-generating properties over to profit-generating properties for potential tax liability mitigation.
2) Hold each property under its own LLC and have every LLC roll up or be owned by a holding company which makes an S Corp election. The tax benefit here is that everything flows up to an additional entity before hitting the investor. You can carry the losses like in example one, and offset them against the profits, thus, again, mitigating tax liability. With an S-Corp election, you can also mitigate the amount distributed to even further mitigate tax liability on what would otherwise be completely pass-through.
- 7yManmath D.Pro MemberInvestor · Spokane, WA · Member since 2016 · 73 posts · 37 votes
I'm glad to come across this post. I have one rental in WV which was my primary residence 3 yrs ago. But had to relocate and put on rent. I'm now thinking how do I protect myself by forming LLC considering it still has mortgage. If I were to put it under LLC, wouldn't bank come after me for due on sale clause ?
- Flipper/Rehabber · front range, southern colorado · Member since 2018 · 55 posts · 21 votes7y
@Arlan Potter have you ever had anyone killed in one of your rentals? Or anything bad happen to a tenant?
- Flipper/Rehabber · front range, southern colorado · Member since 2018 · 55 posts · 21 votes7y
@Manmath D. That is possible but not likely. Talk to your bank they understand what and why your doing it. Hopefully they will work with you.
- Flipper/Rehabber · front range, southern colorado · Member since 2018 · 55 posts · 21 votes7y
@Manmath D. Here is the info straight out of the book on rental property investing.
Many investors simply transfer the ownership of a property to an LLC after purchasing the property in their primary name, but that presents some big risks as well. If the bank finds out (and they probably will, because of insurance paperwork), they might call your note "due" because of the "due on sale" clause. Of course, you didn't actually sell the property, but you did transfer the title from one entity (your name) to another (your LLC). In the past, this has never really been a problem, because banks have generally turned a blind eye to such transactions. However, this seems to be changing and is expected to only get worse as interest rates rise. If you plan to go this route, consider speaking with your bank and getting permission, in writing, to transfer your properties to an LLC after buying them. This is the only way you'll be truly protected from that dreaded "due on sale" clause.
- Rental Property Investor · Louisville, KY · Member since 2019 · 3 posts · 3 votes7y
@Nate Fanara
Hey,
I know a lot of people have commented and I may be reiterating something someone else said but I want to help educate you about this because people seem confused. What I’m about to say is a summary of some Jedi level **** that should be looked into further on your own.
Yes, you should own an LLC in every state you hold property BUT those entities should be setup as pass through companies and should all be held by an NV DE or WY entity. I prefer WY for the anonymity benefits as well as the other tax benefits although other states may have anonymity options. The reason you'd do this is to optimally protect you from being sued in every direction.
If you’re personally sued then some states allow the plaintiff to dig into anything you officially own, entities owned by you, and anything owned by those entities. WY incorporation laws and incorporation anonymity protect all assets you own through a WY that you have setup to be anonymous because there is no record of you owning the entity.
If your individual state RE holding entity is being sued then typically the buck ends at whatever that entity owns but there are cases when even that protection fails (most commonly in CA because they suck) which is why it’s good to put a limit on how much is owned by any entity before it passes through an anonymous WY entity (especially when doing business in states with anti-business incorporation laws).
A lot of people have already said “Consult with an attorney” and while I agree, many attorneys still have no clue about some of the stuff I just talked about so when shopping for an attorney in your area, ask them how much they know about asset protection and that sort of thing. RE attorneys in the state of WY NV or DE are mostly all going to be familiar with this strategy because they deal with out of state investors and business owners all the time. You could just google “most investor friendly attorneys in WY for asset protection” or something like that and start going through the list.
All in all, it’s actually kind of expensive to create a web of corporations so pick an attorney who’s not pushy about forming multiple entities and has reasonable advice about how many entities you need per dollar in assets/cashflow.
I’d pick up a book on the topic though, I’ve read a few and most are pretty comprehensive. One specifically on RE would likely have the most applicable advice because the subject is very broad.
Hope that helps, good luck.
- Saint Joseph, MO · Member since 2018 · 401 posts · 244 votes7y
@Nate Fanara
Check out podcast episode 106. It’s a wealth of knowledge on this subject.
- Attorney, CPA, Broker & Author · Scottsdale, AZ · Member since 2018 · 532 posts · 488 votes7y
@Chris Reel is on the money. One other thing to add about his Option #2 (as @Trenton Farris also says) is that the holding LLC can be registered in a state that doesn't require you to list the names of the shareholders in the initial filings (such as Nevada and Wyoming).
Does that give you 100% protection and make you bulletproof? No it doesn't. But, it does put one more barrier in the way.
- Investor/Accountant/Builder · Meno, OK · Member since 2014 · 1k+ posts · 918 votes7y
@Christopher Orr Nope. How about this:
I have a really bad deck and the tenants write me letters and complain, that they are dangerous and should be fixed. I say no and a kid falls off and dies. Because I could and probably would be found negligent, no LLC, or insurance, or slick Lawyer will help me.
With good insurance, and no negligence on my part, I don't have much to worry about.
The guy above has one rental. He will probably sell it within a year and be out of the business anyway. Some people worry too much. In my opinion.
- Rental Property Investor · San Jose, CA · Member since 2018 · 42 posts · 22 votes7y
@Arlan Potter you guys are really lucky, personally I don't believe in having luck when Murphy's law is also there. The first action I did after buying multiple properties was to contact a RE attorney firm, recommended by BP, and they helped me create legal structure for my present and all future properties. Yes, it cost money, actually a lot of money initially, but I never wanted to start my RE career just to lose my sleep. Now every time, I have a new rental property, I forward the deed info to them and they create another LLC under DST (I am based in CA and that's works best for me)
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