LLC Formation Timing

10 Replies

I am looking to buy a commercial property (20+ unit apartment building)within the next 3 months or so and want to protect myself using an LLC. My question is on the timing of when to create the LLC.

1) When do you normally create the LLC?

- Should I do it now, knowing that the process could take some time and we could always just sit on it for the next few months

-OR Wait until the property is in the process of being purchased?

I've seen multiple here/elsewhere say they do it later on once the deal is being locked in.

Typical is to have the building under contract and past physical DD, just to avoid the cost/time of setting up the LLC and operating agreement.

Two thoughts on timing. One, actual formation or setting up a LLC (paperwork) is quick, can happen within 24 hours. Two, the planning around it can take a little time and something to add to your checklist of things to do. Everybody's situation/goals are different, so have a brief conversation with an attorney to make sure that your needs are addressed.

A third thought, "now", as you described your situation above, is too early. You don't need to think about the LLC until you have a LOI accepted on a building and your negotiating terms of the PSA. It is a checklist item, not something to strategize around.

@Wiley Strahan in terms of strategy - if you have partners or intend to raise private capital then you should seek legal counsel sooner than later. 

Your contract terms should include novation/assignment language to your anticipated LLC as the title holding entity, hence Scott's advice above - once the LOI is accepted but before the PSA is signed (although you may not actually form the LLC until later).

@Wiley Strahan I completely agree with what @Scott Skinger stated. Also, depending on whether you're only investing your own funds or raising money from others, you entity structure may differ (JV versus syndication vs TIC vs something else). If you're opting for syndications, then now is the time to speak with a securities attorney. Alternatively, you still need to reach out to RE attorney (in the case it's not going to be a syndication, rather you opted for another option.)

If you need attorney securities' recommendation, let me know.

Best of luck!

@Wiley Strahan

Depends on the state. In Pennsylvania, for example, you will generally want to form the LLC well before you enter into an agreement of sale due to realty transfer tax concerns.

Disclaimer: While I’m an attorney licensed to practice in PA, I’m not your attorney. What I wrote above does not create an attorney/client relationship between us. I wrote the above for informational purposes. Do not rely on it for legal advice. Always consult with your attorney before you rely on the above information.

Was asking myself this same question last year. Check with your lender. In my case, they were fine with creating it after the sales contract.

Creating an LLC could be fast and only taking a few business days. You can also get your EIN imediatly online when the IRS website does not crash like it did for one my LLC and I had then to revert to fax and wait 2 weeks for the fax back. However getting a bank account could be an ordeal with certain banks and take over two weeks for their compliance Dept to approve it. Last, if your lender is ok with it, it would be better to buy your property dIrectly under the LLC name. But you would then need to sign the offer under this name. For all these reasons, I would probably create the LLC well in advance. You can always wait later to create a specific operating agreement that would match your need, but at least the entity would be ready.

I had my property in an LLC and then when I wanted to refi and take cash out, the mortgage co. said if you haven't taken it out of the LLC at least 6 mo. prior to the re-fi, you won't be able to take cash out. Has anyone else had this happen?