LLC or Sole Proprietor for Rookie

13 Replies

I have a chance to purchase a 12 unit apartment building in another state. It would be my first investment in real estate outside of a residence and I do not have an LLC set up.

Should I set up an LLC or would a sole proprietorship with liability insurance be the best course of action?

@Brian Kennedy  

welcome to the site. In this situation I would probably set up an LLC. As commercial lenders have no problem lending to LLC's. (residential lenders usually will not)

You still need to get liability insurance though.

Brian, I am in a similar situation (Live in FL buying in MS) on a 16 unit for $450K. I am going for an LLC to separate liability as best I can. I will be interested in what others say as I am a newbie as well!

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Originally posted by @Loren Davy :

Listen to Podcast 109. Scott Smith is an attorney that address your question very well. Good luck.

 I was just about to post that. Definately listen to the podcast, then listen to it again.

One form of an LLC is a Sole Proprietorship allowing for pass through income while protecting your personal sets in the event of a lawsuit. Your debate should be between S Corp vs LLC. I would choose a LLC this early in your endeavor. Have an attorney draw up the paper. They did mine for free, in the hopes I would use them for future closings, wills, trusts, Living wills, etc.

S Corps are more for property management.

Thanks to all who have commented.  I will most definitely listen to the podcast.

This next week I will be making an appointment with a tax attorney to get the legal ramifications of real estate investing.  I already have a CPA and will hit him up for some time when he's not so busy with tax season.

Again...thanks!

Also look into setting your LLC in states such as Delaware or Wyoming for maximum protection. You can do some further reading here: http://www.corporatedirect.com/

Check the link under Bulletproof Your Corporation. Garrett Sutton is very knowledgeable and speaks on the Rich Dad circuit. I use this company for my corporate formation and management and am happy with their work. I don't receive anything for endorsing them.

@Luke...I had looked into this before when I had a line on a 4 unit place in Ohio.  The owner had a business dispute with a partner and I ended up walking away from the deal.

I did check into forming an LLC in Delaware while trying to sort out that deal...but from what I've read you have to file in the state you want to do business in regardless of where you have an existing LLC. Delaware is fast and inexpensive but I don't quite see the point in it since I most likely won't be buying in Delaware.

Definitely set up an LLC or other entity. Liability insurance alone is not enough to protect yourself (listen to podcast 109)

Brian - the reason to choose Delaware Wyoming or certain other jurisdictions to form the entity depends upon those state's favorable laws. States differ greatly when it comes to issues such as disputes between members, creditor protection, privacy etc. Yes you have to register where you do business but when a dispute arises the law of the state where the entity is formed which usually apply

Actually @Brian Kennedy the law where the property or dispute arose will be the law that applies.  Lex Locus Delecti.  You can sue even a corporation that does not have an office in the state where the injury occurred, its called Longarm jurisdiction.  Very famous case called International Shoe, google it.

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Originally posted by @Brian Kennedy :

@Luke...I had looked into this before when I had a line on a 4 unit place in Ohio.  The owner had a business dispute with a partner and I ended up walking away from the deal.

I did check into forming an LLC in Delaware while trying to sort out that deal...but from what I've read you have to file in the state you want to do business in regardless of where you have an existing LLC. Delaware is fast and inexpensive but I don't quite see the point in it since I most likely won't be buying in Delaware.

You're right. Ohio law requires foreign business entities to register with the SoS in order to hold property or avail itself of the courts of this state.

As for choice of state: if your LLC gets sued by a third party, chances are high you'll be in Ohio courts interpreting Ohio law anyway. Delaware law will benefit you when there is an internal dispute between members, or when the third party suing you happens to be a Delaware corporation (and then, after much trouble, you can request a change of venue to Delaware if you were not actually sued there in the first place). For the most part, however, Delaware's court excel in interpreting their rich corporate code, so corporate types prefer to be in their courts for shareholder disputes because there is a low chance that the judge will drop the ball on interpreting corporate charters or operating agreements or the like.