I've recently met with both an attorney and CPA (separately) about entity formation. They both offer formation services at vastly different costs. The attorney will charge nearly 8 times as much to form a Series LLC than would the CPA. Although I know I can do much of this myself, I would rather take advantage of either the attorney or CPA's services.
The attorney will spend time creating a custom Operating Agreement (the company will only have one member) while the CPA will create one using a template. Should I spend the relatively larger amount of money (close to $8000) on the attorney's services or should I use the CPA? How much of a big deal is it to have a custom Operating Agreement?
(It was suggested by the CPA to form a Series for my buy and holds and an S Corp for my flips. )
Thanks in advance.
Out of curiosity @Sean S. how many properties do you own? Buy/holds? Rehab/flips?
Legalshield.com might be a place for you to start looking for a cheaper alternative, It definitely helps me out.
My attorney drafted my operating agreement (that works well for my family multi-member LLC or partner multi-member LLC down the road) and my articles of incorporation for my s-corp for $500. He is an exceptional, small town attorney I have known a while, but still. $8,000? That's more than the highly specialized Delaware Trust thing advocated by podcast 109.
I would get a cookie-cutter op agreement and take to an attorney to personalize / ok. It's usually always a better value to have an atty review something rather than draft from scratch. I would shop that offer a bit @Sean S. !
Thanks for the responses everyone. I figured the quote from the attorney was high. I assume I can amend the op agreement at some point too if it becomes necessary.
@Rob Beland I am working on my first right now. I just wanted to be proactive in trying to set these up.
@Sean S. you really need to do some research before spending $8K on an entity that will do nothing (until you start investing). To "LLC" or not is a hot topic for debate here on BP. I have been investing for about 15 years. I own 26 rental units and Im closing on a SFR at the end of the month. I have also flipped and wholesaled. Its all in my personal name. I have a few million in liability insurance. Just do your research. My CPA advises me on all of my investments and has always advised against a separate business entity at my level of investing. Just my experience...best of luck.
legal zoom is a much more affordable option to incorporate and set up an LLC.
Thanks @Rob Beland I will continue to ask around and research so that I can make the best decision. I've read many posts on the subject and listened to the podcast and there seems to be no consistent answer. I'm curious as to the reason your CPA advises against a business entity. Is there a particular reason that they gave you?
Basically it comes down to the fact that my liability insurance protects me. I dont have any business partners either. An LLC would just mean more money on filing fees and even though my accountant would make more money due to more tax returns he advises against it. I have mortgages on all of my properties. It comes down to net worth. What is your exposure if you are sued. The main reason people use to set up an LLC is asset protectection. Thats the debate. Liability insurance vs. LLC.
We have several LLCs in different states. We do it 100% ourselves. We need to hire registered agents in states that we don't have PM for, but that's only about 50/year. It's not worth paying someone 1000's for. Save it and buy better appliances for your tenants and charge them more.
Got it. Thanks again.
The Attorney and the CPA are both benefiting from working for you. I tend to agree with @Rob Beland . I would continue to read and continue to shop around -- getting three quotes from three different CPA's and Attorneys. Delaware's state website has a Business First Steps web site that can help you better understand the requirements as well - search for Real Estate Investor on their site.
I hope that helps.
Thanks Michael R. I'm going to take a look at that site right now.
the debate isn't liability insurance vs. Incorporation. it's whether you need incorporation or just liability. Everyone should have an Umbrella. As Rob with assets think he doesn't need to incorporate as he doesn't want the hassle with the fees well that's likely just his prerogative which may or may not end up being smart. it's certainly true that if you don't have assets to protect them there is no reason for incorporation. Even lawyers are lax to get blood from a rock.
in other news your lawyers a crook trying to charge you 8k for your situation.
@Steve B. could you please expand on why everybody should have an umbrella policy? Is that not your perogative to have an umbrella policy? I dont have one. Am I wrong?
If you had a tumor in your brain would you buy a saw and a mirror and cut it out yourself?? I sure as hell hope not!!
As a criminal defense attorney I cannot stress enough the importance of using an attorney to set up you LLC correcty. Theses online site use cookie cutter forms with may not be applicable in your state and even worse those forms may not permit you to conduct the type of business you desire. Such as permiting your LLC to enter into a loan agreement and go into debt. Always, always use an attorney who fully understands the area of law that effects your life. I am an attorney and I had an attorney set my LLC up becuase I do not practice corporate law and do not fully understand all small issues involved. Dont cheap out now only to find you have screwed yourself over later on down the road.
$8,000 to setup your entity? RUN from that attorney... This would take an 1/2 way skilled attorney less and 2 hours to setup and the best attorney's in the biggest cities usually only charge in the range of $500 per hour .. Personally, I set up all my own online through the state's website for about $100. It's not that difficult to set them up yourself.
Brain tumor? Setting up a single-member LLC is not exactly brain surgery. If you had a sprained ankle, some people would choose to self-treat, some would go see the family doctor, but I sure wouldn't pay $8000 to an orthopedic surgeon.
There are very good times to use an attorney, and when you use one, you want to get a good one, but this is well-trod ground and the state-specific from the major LLC setup sites will work perfectly well for most people. If you had a partner and needed to carefully define roles, a well-crafted operating agreement might be important, but that's not Sean's situation.
In fact @Sean S, you may not even need an operating agreement. Some states don't require them for a single-member LLC. I operated my property holdings company for years without one until an asset manager for Wells Fargo.- the worst of the major banks to work with on REOS - refused to sign off on a sale of a property I particularly wanted without seeing my operating agreement. I pointd out to him that Texas doesn't require one, and I didn't need one. But this guy was new and refused to budge without being able to check off his "operating agreement" box. I created a one-line operating agreement that says "Michael makes all the decisions," filed it with the state, sent it to him and said "Here's your operating agreement." And when you think of it, it's a perfectly accurate description of how a single-member LLC makes decisions.
I have 3 LLCs for 3 very different businesses, ten years in business, negotiated literally thousands of contracts, have had to be a both a plaintiff and a defendant in court, and the verbiage of my operating agreement has never been an issue. One of my businesses sells services to other small-business owners. Out of my 200 business-owner clients, probably the majority are single-member LLCs. I've heard lots of them say, "Damn, I shouldn't have taken my eye off my bookkeper." Never heard anyone say, "Man, I wish I had crafted my operating agreement more carefully."
Legalzoom and an attorney I used to set up and LLC both worked out to be about $350. Iowa only charges $50 to register.
There seems to be no clear consensus on this but it is always good to hear everyone's opinion. I personally feel as though establishing a series LLC is the move for me. Sure, I might be able to get by with just a good insurance policy but my gut says to use both insurance and an entity. The attorney tried to talk me out of doing a series right now since I am in the beginning stages of my investing. So basically a regular LLC would cost close to $1500 and the Series LLC would cost close to $8000. The accountant on the other hand said the series would cost the same as the non-series LLC and that would cost around $600 for her to set up.
All good feedback though. I am going to make a decision very soon but until then I will continue my research.
@Rob Beland it was my impression from your numerous previous posts that you actively encourage people to buy liability insurance but not to use LLC's; citing supposed exorbitant fees and hassle. If that was not your position feel free to correct me.
Umbrella policy's are dirt cheap so there is no overriding reason not to get one assuming you have assets to protect, this is true even if their merits can be questionable under certain circumstances, and completely deficit in others.
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I bit confusing to L.L.C. with or without lawyer or just and umbrella liability policy. I recently read that if you don't L.L.C. the IRS can label you as a dealer and be taxed as regular income on all you deals. This label is difficult to ever escape from. How do some of the individuals here on BP deal with their RE business profits. from flips, wholesaling and rentals? I'm just starting out and was told I needed and attorney to do any business with one company I recently became involved. I don' have a lot of capital for lawyers and fees just starting out. Can I just get and umbrella policy to start and incorporate later as I acquire more real estate. I live in Michigan The layer I talked to stated realtors and brokers have more leeway with RE sales contracts with a lawyer to close. So why not just find some deals with good profits margin and just use a realtor. No marketing expense, no legal fees, and reduced closing cost. I also need 100% funding for first and 2nd for DP on deals.
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