When To Create an LLC?

Real Estate Agent · Cherry Hill, NJ · Member since 2020 · 28 posts · 14 votes

Multiple sub-questions when I ask this because I get pretty confused on this topic. When and why do I need to set up an LLC (For rental investing and flipping)? Will having an LLC for 'each' property do any real justice? Or would it just be pointless in the long run and just be costly? My idea was to set one up (LLC1) for rentals with an umbrella policy and only set up a different one (LLC2) when doing a joint venture. What's the best way to go about this?

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David M.

Morris County, NJ · Member since 2020 · 5k+ posts · 2k+ votes

@Brandon C.

The more formal way to go would be with your Option 2. You want to leave your holding LLC "clean." All the liabilities should be contained in sub-LLC's so that they can be discarded as necessary along with the associated liablity.

If you are going to buy anything into a LLC, it should be purchased with that LLC. Otherwise, you will probably get into the same problems as other when they buy a property personally, then try to transfer it.

Learn about maintaining your "corporate veil" and not to "pierce" it. Once its pierced, you've lossed your legal asset protection. The easiest way to screw up is co-mingle funds.

The primary issue with using LLC's for long term investment is the financing. LLC's can only get commercial financing which is more expensive and with worse terms than the usual conforming residential loans. This is why many of us use insurance and umbrella policies. The insurance mitigates the risk while being able to take advantage of cheaper financing. Of course, this isn't as wise with larger properties...

You need to determine how much risk you are willing to take and how much your want to pay, both in direct costs and administrative time, to layering up with LLC's. Each LLC will need its own bank account at a minimum. There is more bookkeeping / accounting required to keep track of the funds and moved them around correctly. For example, using your option 2 structure, lets assume you needed to use funds from Rental 1 to help with your flip. You'd have transfer the funds to the rental LLC, then to the holding LLC, then to the flipping llc.

You want to keep your long term investments separate from your short term investments for liability reasons.

Just the same way some say to use one LLC per rental, some use a LLC per flip. The latter is necessary usually if using hard money loans. Also, by discarding the LLC you also get rid of the liability the property carries. For example, what if there is an electrical fire a year after you sell? They could come back to sue you (right or wrong..). If everything was operated out of the LLC, there is nothing to sue for...

I hope this helps. Good luck.

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Nathan CrossBusiness Member
Investor · Saint Louis, MO · Member since 2019 · 146 posts · 66 votes
6y
Hi Brandon. This is one of the most debated topics I have seen asked on multiple forums. So what you posted as your reasoning behind the LLC is great, and does work out for investors. I myself have set up LLCs like this as well, but it always boils down to personal preference as well.
So I have set up a "Parent" LLC which is for my real estate investing business; to do transactions for flipping, wholesale deals and for my commissions as a Real Estate sales agent. With the "Parent" LLC, I can then have "child" LLCs that will have the same operating agreement (husband and wife) as my "Parent" so that I can keep my buy and hold in the "child" LLCs. Also when I do future deals with other investors my "Parent" LLC name will be used as member of that future joint venture.
Now having it set up like this does cost money to set up and of course yearly fees. So be prepared for this as well.
So if you are starting out you can go with one until you start making some money to create more. IMO I thing as long as you treat it as a business you will be fine.
15 Reply
Brandon C.
OP
Real Estate Agent · Cherry Hill, NJ · Member since 2020 · 28 posts · 14 votes
6y
@Nathan Cross Thank you so much for the reply. To your point, would it be smart to have rentals under the parent LLC while having joint ventures (child LLCs) under the parent? God forbid they use my rentals as collateral lol
0 Reply
Nathan CrossBusiness Member
Investor · Saint Louis, MO · Member since 2019 · 146 posts · 66 votes
6y
@Brandon Carey I personally am not doing that, because the parent will be the one doing the transaction. So when I buy a property that needs to be rehabbed I will place it under the child right away after I purchased it with the parent.
2 Reply
Brandon C.
OP
Real Estate Agent · Cherry Hill, NJ · Member since 2020 · 28 posts · 14 votes
6y
Here's a drawing I shared with my friend who's an accountant, (hopefully it makes sense lol) So it's best to go with option 2?
9 Reply
Nathan CrossBusiness Member
Investor · Saint Louis, MO · Member since 2019 · 146 posts · 66 votes
6y
@Brandon Carey I plan on flipping with my parent LLC, since a flip is transactional. The child LLC is for long term holds. That's what I am doing
5 Reply
Brandon C.
OP
Real Estate Agent · Cherry Hill, NJ · Member since 2020 · 28 posts · 14 votes
6y
@Nathan Cross Oh okay, that makes sense
0 Reply
Nathan CrossBusiness Member
Investor · Saint Louis, MO · Member since 2019 · 146 posts · 66 votes
6y
@Brandon Carey hope I was helpful in some way. The great debate of to LLC or not to LLC will always be muddy water. Just depends on your plan.
2 Reply
Brandon C.
OP
Real Estate Agent · Cherry Hill, NJ · Member since 2020 · 28 posts · 14 votes
6y
@Nathan Cross big time man! just a response is helpful in itself :)
0 Reply
Nathan CrossBusiness Member
Investor · Saint Louis, MO · Member since 2019 · 146 posts · 66 votes
6y
@Brandon Carey true that! Reach out anytime man, and I will help you any way I can or point you to a person that can.
1 Reply
Nelson Mendes
Rental Property Investor · Brockton, MA · Member since 2016 · 18 posts · 11 votes
6y
@Nathan Cross makes a great point! I would say to @Brandon Carey the time to open a LLC is when you know for a fact your ready to invest because for myself I made the mistake of procrastinating for a long time by not being active with my LLC and it costed me based on the part of spending money where it probably wasn't needed in the beginning. My LLC being open became costly while I wasn't investing. Today I'm good and excited to say learning from others to be great at your own craft is the best thing you can do.
2 Reply
Brandon C.
OP
Real Estate Agent · Cherry Hill, NJ · Member since 2020 · 28 posts · 14 votes
6y
@Nelson Mendes thanks for the reply! To your point, was it ever questioned when you made a owners draw?
0 Reply
Nelson Mendes
Rental Property Investor · Brockton, MA · Member since 2016 · 18 posts · 11 votes
6y
@Brandon Carey when it came to owners draw I never mixed my real estate LLC profit with personal expenses. I turned around and reinvested. I'm also working myself on always leveling up as I'm careful on my spending at any giving time in my journey.
1 Reply
Brandon C.
OP
Real Estate Agent · Cherry Hill, NJ · Member since 2020 · 28 posts · 14 votes
6y
@Nelson Mendes yeah of course but I’m thinking owners draw for actual expenses (groceries, wi-fi, gas, etc.) not anything extra
0 Reply
David M.
Morris County, NJ · Member since 2020 · 5k+ posts · 2k+ votes
6y
@Brandon C.
The more formal way to go would be with your Option 2. You want to leave your holding LLC "clean." All the liabilities should be contained in sub-LLC's so that they can be discarded as necessary along with the associated liablity.
If you are going to buy anything into a LLC, it should be purchased with that LLC. Otherwise, you will probably get into the same problems as other when they buy a property personally, then try to transfer it.
Learn about maintaining your "corporate veil" and not to "pierce" it. Once its pierced, you've lossed your legal asset protection. The easiest way to screw up is co-mingle funds.
The primary issue with using LLC's for long term investment is the financing. LLC's can only get commercial financing which is more expensive and with worse terms than the usual conforming residential loans. This is why many of us use insurance and umbrella policies. The insurance mitigates the risk while being able to take advantage of cheaper financing. Of course, this isn't as wise with larger properties...
You need to determine how much risk you are willing to take and how much your want to pay, both in direct costs and administrative time, to layering up with LLC's. Each LLC will need its own bank account at a minimum. There is more bookkeeping / accounting required to keep track of the funds and moved them around correctly. For example, using your option 2 structure, lets assume you needed to use funds from Rental 1 to help with your flip. You'd have transfer the funds to the rental LLC, then to the holding LLC, then to the flipping llc.
You want to keep your long term investments separate from your short term investments for liability reasons.
Just the same way some say to use one LLC per rental, some use a LLC per flip. The latter is necessary usually if using hard money loans. Also, by discarding the LLC you also get rid of the liability the property carries. For example, what if there is an electrical fire a year after you sell? They could come back to sue you (right or wrong..). If everything was operated out of the LLC, there is nothing to sue for...
I hope this helps. Good luck.
16 Reply
Brandon C.
OP
Real Estate Agent · Cherry Hill, NJ · Member since 2020 · 28 posts · 14 votes
6y
@David M. I'm getting a better understanding now. Thank you for your answer too! Now follow-up question, what would the discarding process look like?
0 Reply
David M.
Morris County, NJ · Member since 2020 · 5k+ posts · 2k+ votes
6y
@Brandon Carey
Discarding? Stop using the LLC, don't have it buy anymore properties. Draw all the funds. Close it up however your State requires. Bottom line: take out all the remaining assets (ie sell the property), cash, etc. Now if somebody comes to bring a lawsuit, the LLC has nothing for them to go after.
For example, most people just name the LLC using the street address. It's pretty unique unless somebody has beat you to it. It lets you keep track of which LLC goes with which property. Works for both rentals and flips.
4 Reply
Andy Keffer
Investor · Clearwater, FL · Member since 2020 · 9 posts · 7 votes
6y
@Brandon Carey look into revokable living trusts. They are a great way to protect individual assets. That is the system my partners and I use as well as a "parent" LLC. Also protects you from having an umbrella insurance policy that makes you more liable than the common man would lend you to believe. Umbrella policies are a neon sign for lawyers, saying hey, I am well protected why don't you sue me so my insurance company settles with you. The revokable living trust and individual insurance policies allow you to "dump" a single property threat and never put your entire structure at risk. But as is almost as everything in life, to each is own. This is the best way I have found to keep my "veil" from being "pierced".
3 Reply
David M.
Morris County, NJ · Member since 2020 · 5k+ posts · 2k+ votes
6y
@andy

@Andy Kefferundefined
That's interesting... everything I've seen and talked to people is the trusts offer increases anonymity, not asset protection. Since the LLC's aren't exactly impossible to hide, the trusts are can be hidden because there is no filings to be recorded (that's just one aspect)
0 Reply
Andy Keffer
Investor · Clearwater, FL · Member since 2020 · 9 posts · 7 votes
6y
@David M. Yes, the trusts are for you to remain anonymous which is why the umbrella policy shoots you in the foot. But when done properly with a parent LLC as a trustee and property in a revokable living trust with an individual insurance policy, you have the protection and anonymity. Truth is, if someone really wants to sue you, they will. But this system never allows for your properties to be tangible to one another. There is way to many lines to cross to get through the veil. Of course, as long as you don't do something dumb; like sign your personal name without a title attached to a legal document.
3 Reply
Jesse Cote
Rental Property Investor · Stratham, NH · Member since 2020 · 56 posts · 20 votes
6y
@Nathan Cross Hey Nathan, I'm becoming a Realtor in the coming weeks, and I haven't thought about having an LLC for that income as well. How does that work?
1 Reply
David M.
Morris County, NJ · Member since 2020 · 5k+ posts · 2k+ votes
6y
@Andy Keffer
Yes, I agree with that standpoint. The anonymity of the trust is what is providing protection, not a legal protection. That's why the trusts and LLC are paired.
0 Reply
Nathan CrossBusiness Member
Investor · Saint Louis, MO · Member since 2019 · 146 posts · 66 votes
6y
@Jesse Cote so with realtors being 1099 earners or contractors you could set up an LLC or not to be honest. Either way you go, you have to track all expenses incurred during the tax year that has to do with you being a realtor.
The reason I am filtering my Future Agent fees into my LLC is because that LLC is being used for all my other transactional deals involving in Real Estate.
I am by no means a CPA, but you should consult one before you make a choice on which route fits you right now.
I hope that helps.
1 Reply
David M.
Morris County, NJ · Member since 2020 · 5k+ posts · 2k+ votes
6y
@Jesse Cote
I haven't heard of an agent being able to use a LLC. Maybe it's okay in your State. But normally licenses are issued to people, not legal entities. So, you personally have to work for a broker, not your LLC. As such, the LLC can't provide any legal protection.
0 Reply
Jesse Cote
Rental Property Investor · Stratham, NH · Member since 2020 · 56 posts · 20 votes
6y
@Nathan Cross certainly, thanks!
0 Reply
Brandon C.
OP
Real Estate Agent · Cherry Hill, NJ · Member since 2020 · 28 posts · 14 votes
6y
Loving all these answers guys, thank you all so much!
0 Reply

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