Do I need an LLC when starting up a small real estate business as a second source of income

11 Replies

hi guys, quick question for anyone that can help me out. I'm currently beginning to dabble with the idea of buying and selling vacant land. As I already work this will start as more or less a hobby as I learn the ropes until I get to the point that I can make it a lucrative second source of income. For the time being should I be concerned with starting some sort of LLC. Obviously not at the point where this is any type of business yet but I want to be sure that my personal assets are protected. (I should add the current plots i Will be dealing with are only around 3-5k as I get started. Thanks for any info anyone has!

I wouldnt get one but you can get an LLC for only $150 at the courthouse. For only that little why not.

not necessary

My wife and I are also land investors. We created an LLC this past December after getting our first flip under contract. I think we could have held off a bit longer, but creating the LLC made this "Hobby" an official business and is treated as a business. Since it is my wife and I that are the owners/members of the business, the IRS sees us as a disregard LLC. Please meet with an accountant to understand how your profits will be taxed and how to properly file your taxes. On another note, We also started with $3k-$5k lots, and quickly realized that they had limited, if any, profit. Fixed costs such as closing costs can quickly eat up your profit.

Hi Ross,

I would caution anyone who does business outside of an entity in this day and age of frivolous lawsuits. The opinions of others to NOT have an LLC are fine for them, as it is a personal choice. But what happens when your $5000 lot ends up in some sort of lawsuit, that may have no merit what so ever, and all of your personal assets are locked up until the suit is settled.........

This will be a no win situation for you.

Also, make sure you educate yourself on entity structures. They are not all created equal.

Happy Investing

Derek Dombeck

I would agree with @Arlan Potter  .  Basically not necessary.  I have one for my larger multi-family apts which is a completely different animal than raw land, of course.  I like the anonymity of having one.  I file my own taxes and they're not too bad now that I am an 'active non-reporter' with the state and no longer have to do quarterlies.  If your state will require quarterly B&O tax reporting, I wouldn't do it for your purposes.  Too much hassle and the chance of lawsuits in general is low.  A lawsuit against a vacant land owner?  Get title insurance and make sure the land was never under some commercial use like a gas station or something.

@Ross Benedict  

An LLC is not NEEDED in order to start your REI business, but it's a good idea to consider it. It really comes down to your level of comfort regarding potential liability and the extent of assets that are at risk,

An LLC is intended to encapsulate your property within a separate legal entity for liability purposes. In other words, you keep your personal and business assets separate so that if your business incurs a liability (for example, a judgment against you in a personal injury lawsuit arising from a claim that an unsafe condition at your property caused the injury), your personal assets are insulated from being liquidated to satisfy this judgment.

Many RE investors keep each house in a separate LLC. The reason for that is the same. The idea is that assets (houses) in separate LLCs cannot be reached to satisfy a judgment attached to a particular LLC.

The concept is great. In reality, you need to be aware that you can certainly conduct business in a way that could negate the advantages of the LLC (e.g., comingling (mixing) personal and business funds). This is called "piercing the corporate veil" and allows a plaintiff in a lawsuit to go after you personally for liabilities incurred against your business. So, it's imperative that you properly follow the rules relating to operating your business.

Also, it can be a headache to manage several different LLCs covering several different properties. Similarly, the costs for LLCs in certain jurisdictions can really eat into the bottom line. The tax laws of a particular jurisdiction can do the same. So you really need to have the proper guidance to get the most from the LLC structure. Like anything in business, it can be complicated, but you CAN learn and understand it.

Another (not exclusive, but potentially supplemental) way you can limit the risk is to get an umbrella insurance policy on your properties that will protect you by paying out for covered liabilities in the event your property incurs them.  I highly recommend an umbrella policy on any property.  They typically aren't that expensive for basic coverage, and will probably be sufficient for the most typical claims you might encounter.  That said, there are exclusions, and you need to read the policy to understand what is covered, to what extent, and what isn't.

For ME, at a minimum, I have a separate LLC that runs and manages my business and separates business assets from personal assets. For multiple properties, I'm of the opinion that there is a threshold dollar amount of assets I will risk in each LLC. So, each LLC may hold e.g., ~$250,000K in property (could be one property, could be multiple properties) and each property therein will have an umbrella insurance policy.

Long story short, it depends on how and whether you want to distribute the risk and then how that plays against the complexity of managing multiple LLCs.  There are a lot of variables, but you can ultimately figure out the best way to go for you with help from a good attorney and accountant.

For those starting out in buy and hold, I recommend that you at least have a separate LLC for your business, even if you don't have more than a single property. It MAY be overkill, but I know I don't want to be that guy posting on here about how I relied on only an umbrella policy and ended up losing all of my personal and business assets because of a freak accident or savvy plaintiff.

Just realized I didn't really apply my answer to your particular situation.

If I understand correctly, you're not buying and holding.  You plan to flip vacant land?  I've never done it, so I'm not sure what the liabilities might be.  I would guess that you will be holding the land for some period of time before selling?  How long?  Could there be hazards on the land?  Is it likely there will be people moving around on the land (with or without your permission)?

These are some things to be thinking about. What is the real risk that I could face a lawsuit? If you think its low, the LLC may be overkill. Also, keep in mind that it may depend on the individual land. Finally, if you have any personal assets you absolutely MUST protect, I think an LLC can't hurt.

@Steve Perkins   your way really makes sense to me. i think thats the way im gonna go. i am going under contract on my first commercial property next week. 18 units and 3 store fronts. why type of coverage would you suggest. i've only owned a duplex with no problems and this deal fell into my lap. any info would be greatly appreciated 

@Michael S.  

Sorry, Michael.  Large multifamily is out of my area.  I suggest you get on the phone with your insurance company (and others) and start seeing what's available.  Post you options on BP, and I'll bet you'd get a ton of suggestions.  Great question.

I agree with @Steve Perkins - but then again that may be the lawyer in both of us. If you do decide to go with an LLC or any other structure please do not go to some online site or do it yourself. There is no one size fits all. And before I am knocked as attorney advising people to get professional guidance I will say that it costs much much more when a structure is not in place or just bought off of a website and something goes wrong.

In your case, occasional vacant land flips are unlikely to generate much liability as compared to residential units do an LLC may not be necessary

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