Is an LLC needed?

Question

So, I have been researching, and researching, and researching...and loving every minute. however, I see so many Investors talking about their LLC. And so many others not. I have an LLC. well, I did, bath and kitchen remodeling, and am about to call the S.O.S. and have it closed. (I am not intrigued by crawling on my hands and knees laying tile, or dry walling any longer) and my question is, Why do some investors have an LLC. and others simply keep their jobs, and just purchase property after property and never went through the "trouble" of setting up a business. Did I miss something extreme? Do I hold off on canceling, and then perhaps, change the business name along with a few other things (ie. updating Articles of Org. ) and starting an actual investing business? I know it's broad and thank you in advance!

Adam V. · Answer

You have to be careful if you are a sole member of the LLC.  If you don't follow strict guidelines to create clear and demonstrated separation between your personal activities and your business activities you are exposed to the LLC being viewed as a shell entity and it will not provide you the LL that you seek.  There are some great articles and youtube videos from tax/corporate attorneys explaining how to protect yourself.  When in doubt grab an umbrella.

Francisco Villa · Answer

An LLC may not always be required but it definitley can help for writing off things along with helping for raising capital in the future for your real estate investments.

Sid Leibowitz · Answer

David. LLC and Subchapter S corps are a decision that has broad implications. Talk with your account about the need for those opposing the simple business license. Do not give it up without talking with account or attorney.  Especially if you have assets like property, savings  or vehicles.  Best Sid Leibowitz, Glen Cove, NY

Ralph C. · Answer

@David Noskiewicz, The LLC - its all about protection and keeping your name out of litigation.

Protection from bad tenants or buyers that may come after you down the road and also to preserve your personal assets.

Its simple to set one up, check with a local attorney for consultation.

David Noskiewicz · Answer

Thank You, Very Helpful!

Scott Trench · Answer

Here are some questions that might help here:

Will you have significant wealth outside of the real estate and hard to reach places like retirement accounts that you think might be vulnerable even if you have insurance?

Will you be directly involved in management of the property?

Will you be willing to either take on much more expensive non-recourse financing set up through the LLC, or willing to move the property to an LLC after financing in your name, thereby triggering a due on sale clause?

I do not hold my properties in an LLC. I do not do this because:

1) I have few assets outside of the properties to protect - most of my wealth is in my real estate equity and the operating accounts funding those properties

2) I am not willing to violate a due on sale clause and want excellent interest rates over 30 year terms, something that is difficult to do with non-conventional mortgages on small multifamily or residential real estate.

3) I manage the properties myself, and even live in some of them, meaning that it can be difficult to demonstrate the difference between business and personal, meaning that an opposing attorney might have a good shot at piercing the corporate veil in potential future lawsuits.

Everyone's situation is different, however, and as always consult an attorney. Next week's podcast will talk about this as well!