JUST STARTING OUT... Do I need an LLC?

Question

I’ve purchased a few units (5) this year in Georgia and I’m wondering if I need to get an LLC. I’m up for answering any questions that you may have in order to get some solid feedback. I look forward to your responses!

Scott Smith · Answer

When I sit down with clients, I always discuss (1) their personal assets, and (2) what their current investments portfolio and other business ventures are before discussing (3) their future goals. Each of these variables will dramatically change the advice I give the individual asking me this question. Generally though, I break it down into the "five pillars" of protecting your assets.

The first pillar is avoiding unnecessary and risky activities (don't drink and drive, insurance generally won’t cover your poor decisions) and take good care of your investments(maintain your property, etc) - these simple steps will help you prevent lawsuits before they even occur.

The second pillar is a good insurance policy as that cover the majority of your exposure. However, insurance is limited because it only protects you from one type of liability: accidents/negligence. Insurance doesn’t protect you from any part of the sale or acquisition of a property (e.x. Somebody wanting to sue for you backing out of a bad deal or accusing you of selling them a property with defects like unknown termite damage). Insurance also doesn’t protect you from misunderstandings, especially those made in writing and email. What happens in these misunderstandings is that something goes wrong either in the sale or after, and then they sue you for some statement you made that they “misunderstood”. That lawsuit is a claim for fraud, and that’s what fraud typically is...a misunderstanding and someone being “injured” and wanting to hold the other responsible for it. Insurance never protects you from these kinds of claims and they happen all the time.

The third pillar applies after you have good insurance You need to protect yourself from what insurance doesn’t cover by compartmentalizing your assets. Compartmentalization means that if something happens to one property, people suing can’t touch you or the other properties. You should use either LLC’s (the old and expensive way) or a Series LLC (the new and more cost/time effective way). No matter where you live or where you own assets, I personally recommend the Series LLC to be a great tool for the individual investor who is planning to expand their operation, as it allows for you to scale infinitely for FREE. If you’re interested in using an LLC, this article  also further explains the advantages of a Series.

The fourth pillar is somewhat similar - you want to separate your operations from your assets. One company owns everything and does nothing (this is your SLLC a/k/a “asset holding company”) and a completely separate company handles all of your operations (this is a traditional LLC a/k/a “operating company”) For the operating company which serves as your face to the world and through which you do all your business, you establish a Traditional LLC to carry out the operations of your investments. The operating company takes on all of the liability that would otherwise blow back on you including: paying property management, paying contractors, collecting rent, marketing, etc.

The fifth pillar is owning everything anonymously. If people don’t know that you have assets, then they are less likely to sue because there’s no use in suing people that qualify for food stamps. This anonymity can be accomplished for free by using land trusts to own your companies as well as the assets. Trusts create this anonymity by removing your name from public record. Even if they can see you used to own a property, when properly transferred it will look like it was sold to investors. If they somehow guess you are the owner though, it still doesn’t matter because you would not be the owner. The land trust and the LLC are the owner of the asset/real estate, so even in the scenario that potential litigants guess, they would guess wrong.

One thing I really do recommend is talking with an experienced attorney to get an accurate idea of the exposure you face. From that point it can be pretty easy to select a strategy that you are comfortable moving forward with. I personally invest a lot of time and money into protecting my own investments because I have found that I can focus 100% of my energy on moving forward rather than being fearful of the "what-ifs."

Good luck moving forward!

Scott Smith · Answer

I also just noticed you were from California. In that case you will have additional costs involved with an LLC, due to their beastly franchise taxes. Another option you could look into which functions similarly to the LLC to protect your assets is the Delaware Statutory Trust.

Dennis Cosgrave · Answer

You have a choice. Set up an LLC or get really good insurance. When you are dealing with the public you have to protect yourself from potential liability which can be significant. In addition to the liability protection, an LLC offers a number of tax benefits.

Mike S. · Answer

@Will Tanzie

Please search this forum as there are hundreds of posts on this subject already.

Nobody can answer your question. Only you can decide if the cost of using entities for asset protection is worth for you. You will have to educate yourself on the pro and con of LLC to fully make a proper assessment.

In my specific situation I have made the choice of using LLCs. Some may have not.

Guy-mario Vilsaint · Answer

I'm still working to get my first but I already up my LLC

JUST STARTING OUT... Do I need an LLC?

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