LLC - Must have or nice to have?
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Rental Property Investor · St. Paul, MN · Member since 2016 · 3k+ posts · 3k+ votes
7yYou don't ever need an LLC, but it would be very wise to form an LLC for each property for a protection stand point. Make sure that you run it like a business. Set up a bank account, and run all expenses and income through the business
97 Replies
- Member since 2019 · 1 post · 0 votes7y
@Ethan Smith yes you can open with EIN and Certificate of Formation (LLC Papers)
- Rental Property Investor · NJ/PA · Member since 2016 · 555 posts · 149 votes7y
I have an offer accepted. How many days it takes to create a new LLC and open new bank account to fund the deal in cash.
Later will refinance.
Originally posted by @Williams Federico Calderon:
@Ethan Smith yes you can open with EIN and Certificate of Formation (LLC Papers)
- Syndication Expert and Investor · Indianapolis, IN · Member since 2016 · 591 posts · 808 votes7y
Not to pile on the already good information and opinions posted prior but in Indiana it takes me about 10 minutes to create an LLC online with a little over $100 in filing fees, and then another 5 minutes to file and receive an EIN from the IRS.
So if you have 15 minutes and $100, seems like an easy answer. We use a separate single member LLC for each deal we invest in, even syndicated deals, which are 100% by our holding company. We have a template operating agreement for each SPE (single purpose entity) that we paid our attorney for one time.
Obviously other states are different and if you pursuing non commercial deals it may complicate things (another reason to do commercial 5+ unit deals and not residential).
Hope this helps and good luck!
- Attorney · Santa Cruz, CA · Member since 2015 · 345 posts · 358 votes7y
The answer really depends on how much you have to lose. If you own one property and that's all then you might not need one. But if you own, let's say a rental property, a home you live in, and some other investments, then separating the investment properties within individual entitles is the best liability protection money can buy.
With the new tax laws, there are also tax advantages.
- Rental Property Investor · Rockford, IL · Member since 2014 · 4k+ posts · 2k+ votes7y
Originally posted by @Kyle Neff:
Hello BP Community!
I am considering investing in both residential multifamily properties as well as some 5-15 unit complexes. Do I need an LLC when moving forward with a commercial property in that unit range, or is it just a "nice to have"?
Disclaimer: this will be my 2nd investment property, the first is a SFR. Look forward to the feedback!
"The" answer, as always, is "it depends".
If you don't care about losing everything you own - including your personal residence and possessions - in litigation, then yes - own in your own name.
If you'd rather have some protection against lawsuits, etc., hold properties - including your personal residence - in a business entity structure. Your tax attorney / accountant can help you answer questions and devise an effective strategy.
I don't actually know as there is "the" answer, but this is one of many possible.
Hope this helps ...
- Real Estate Agent · Weatherford, TX · Member since 2015 · 6 posts · 2 votes7y
- Rental Property Investor · Cincinnati, OH · Member since 2017 · 258 posts · 207 votes7y
@Kyle Neff - I highly recommend setting up an LLC. It is easy to do and provides that protection. Ideally, you do it for your single family, but I can understand the administrative burden that makes it a pain for a SFR.
If you are doing a multi-unit and especially an out of state investment, you definitely want to have an LLC. In Ohio they are only about $100 to form. Plus, you will need to establish a separate bank account for your funds.
You even want to do this with 4 family property. Even though your mortgage on 1-4 units will say it cannot be assigned to an LLC, most banks will not have an issue with you deeding it to an LLC after the fact and that is typically best practice anyway.
- Flipper/Rehabber · NY (long island) · Member since 2018 · 1 post · 1 vote7y@Jonathan M Peters it’s can be for your protection, if someone were to sue you. You would be protected because you have separate entity from your business
- 7yJay HurstBusiness MemberLender · Dallas, TX · Member since 2017 · 1k+ posts · 1k+ votes
I thought I would just summarize what has been said in this thread in how financing works in a LLC from a lenders perspective:
1. Can I put a conventional loan in a LLC?
Fannie/Freddie will NOT allow you to vest in a LLC or any entity other then a revocable trust. So, a conventional loan that has the bests rate/terms has to be in your personal name no matter who the lender is.
2. Based on number 1, can I close in my name and move the conventional loan over to a LLC?
If you do, you have violated your due on sale clause because you essentially sold the property to your LLC. Your LLC was not underwritten for the loan, you were. Do people it? You bet, but if the servicer finds out they right to call the note due in full. That is what you signed at closing.
3. can you get any loan in a LLC?
You bet. You just have use a portfolio/commercial purpose loan and have your LLC underwritten along with everything else. The vast majority of these would still be recourse loan and show up on your personal credit but can vest in your LLC.
4. What are the terms of loans that will vest in a LLC?
Of course it will depend on the lender/loan program but the terms are NOT going to be as good as a conventional loans (Fannie/Freddie backed loans) But, you CAN absolutely get 30 year fixed and 30 year amortized loans.
Hurst Real Estate, INC4.991 Reviews - Handyman · Mountlake Terrace, WA · Member since 2018 · 48 posts · 14 votes7y
Originally posted by @Zanetta Bryant:
@Jonathan M Peters it’s can be for your protection, if someone were to sue you. You would be protected because you have separate entity from your businessI guess the correct this to say is When someone sues instead of if :)
Thanks for your help.
- 7yGeorge SkidisPro MemberRental Property Investor · Belleville, IL · Member since 2017 · 875 posts · 529 votes
Rule #1: Don't own anything in your name. Rule #2 Rules are meant to be broken.
For what it is worth I think the guru's selling LLCs have greatly overstated their value to an investor and are charging outrageous trumped up fees and the only folks making money with them are the shady folks marketing them 24/7.
After examining the "Tax Cuts and Jobs Act" (Trump Tax Cuts) the most beneficial income tax treatment starting in 2018 is the "S Type Corporation". This is a flow through to your personal income tax return. A single member LLC is also a flow through entity. There is more case law on the books to support corporations than there is for LLCs.
I will never use an LLC - PERIOD.
When using any flow through entity such as a single member LLC or S-Corp please remember that in a lawsuit the plaintiff will request your tax returns from the court. Once you provide them all that privacy is lost. If the properties are held in a land trust you still have layers of insulation between you and the separate land trusts you are using.
In Illinois ALWAYS hold title to real estate in an Illinois Land Trust.
You need to have plenty of liability insurance. You should carry $1 Million on your property policy and another $2 Million as a liability umbrella.
What every body is parroting may not always be the best choice. Always check out other options.
- Flipper/Rehabber · Bowie, MD · Member since 2018 · 1 post · 0 votes7y
@Kyle Neff not required, however, definitely recommended. If you decide to use an LLC, I would suggest looking into what states provide the best protections. Asset protection is very important especially when dealing with commercial properties.
- Real Estate Broker · Cleveland, OH · Member since 2017 · 719 posts · 658 votes7y
Originally posted by @William C.:
Just learned some very interesting tax codes that encourage LLCs. I will create an LLC tomorrow, and instantly reduce my income tax bill by $15,000. Kinda blew my mind I wasn't doing this already.
Unless you create an LLC as a corporation, it won't make any tax difference.
Your LLC is disregarded entity for tax purposes, if it's single member and if it's partnership - K1 schedule is still pretty much won't get you anything.
If you pay yourself a salary and create C Corp, then you really have to count benefits: there is break even point before which you'll lose money.
I'd discuss it with your CPA before you open an LLC.
It not that expensive in Ohio ($99 to open, no maintenance payments) but it won't protect your assets....as it was stated before, in case of litigation, you'll have to show your personal tax return, where all your LLCs living :))
Partnerships in K1's, rentals in sch.E, managing in sch.C etc. The only reason I'm using LLC's is identity protection.
When you file any paper with city or county, you don't use your SSN as an owner but rather EIN of the LLC.
Also, the info of ownership is public in Ohio: you don't want every tenant to know that you own tons of houses.....especially if it's free and clear......that's when people want to think how they can take you to the cleaners
- 7yScott SmithPro MemberAttorney · Austin, TX · Member since 2014 · 1k+ posts · 932 votes
In reality, you never need legal protection... until you do. When a person brings you to court with a lawsuit that has your name on it, you had better hope you have some layers of protection between you and that disgruntled individual. If you are operating the rental property correctly through an LLC and they had a problem insurance wont cover, the liability ends with that asset. If you owned that rental property in your own name, then if they get a judgement then the sheriff can bring it over to the bank and start picking through your assets to sell at auction until the judgment has been met (it's their choice what to sell, not yours.) You can proclaim your name to the world, but if you structure things correctly it doesn't matter because you can dismiss random claims. Ideally, of course, you want to avoid that issue altogether - some states (WY) offer that as a part of their LLCs, while you can also introduce those same functions through trusts for LLCs that don't offer it by default.
Through an anonymous trust, known as the Agent Trust, that can own the Parent Series LLC or traditional LLC itself, and through other anonymous trusts, known as Land Trusts, that will own the individual's assets. The Agent Trust is the member listed on the filing and since the Agent Trust is a private document and it is not filed with the State, anybody researching the grantor/owner or beneficiary of the Agent Trust will be unable to find that information in the public records. Same for the Land Trust. It is a private document and not filed publicly. This means anyone looking to sue you would need to invest some money and effort into a discovery, which is a gamble that attorney's don't like to make. Attorney's would much rather chase individuals who prefer to keep things straightforward and own it all in their own name - you get to easily see what the payout could be and measure the potential settlement before investing much effort into a case.
Asset protection strategies will take you down a bottomless rabbit hole. As you grow, you implement more to keep yourself covered - you become more of a priority target for law suits since people see $$. When you are starting I just recommend people look into the basics. That means taking good care of your property, finding great insurance and - for me and anyone who doesn't want to deal with a law suit potentially invading your personal life for the next 6-18 months - some type of liability protection entity.
- Member since 2019 · 1 post · 0 votes7y
I ran across an interesting read.
https://www.themoneycommando.com/umbrella-policy-vs-llc-asset-protection-part-1/
- Real Estate Agent · Souderton, PA · Member since 2016 · 591 posts · 414 votes7y
@Irina Belkofer I did discuss it with my CPA, and he's the one that showed me how to use the tax code to my advantage. So everything you said might be true for your situation, but mine is certainly different, because having an LLC and not having an LLC is the sole reason I can get these tax savings. I appreciate your input though.
- Investor · Granger, IN · Member since 2015 · 195 posts · 129 votes7y
@William C. Your right, as a former CPA you can get some tax savings with and LLC and some protection. They are cheap so just do it. You will want one when you have 100 properties so just get it done now.
Good Luck
- Investor · Chicago, IL · Member since 2009 · 1k+ posts · 1k+ votes7y
Some states have "series LLCs" which allow you to have an umbrella LLC and then an individual LLC for every property. It is not realistic to put every property in separate LLCs if they are small holdings. For apartment buildings, it is quite common business practice to drop them into separate LLCs.
- Bloomfield, NJ · Member since 2017 · 17 posts · 13 votes7y
@Kyle Neff Yes, I just got started and used https://www.llcuniversity.com/ It was very easy for me and online filing was $125. I'm closing one my first rental next month and I'll have my LLC in 7-10 business days.
- Syndication Attorney in Newport Beach, CA · Member since 2014 · 55 posts · 83 votes7y
WHY ASSET PROTECTION? Asset Protection lawyers often ask audience members at seminar presentations 2 simple questions. First, “how many of you have been sued before?” Typically about 1/3rd of the hands go up. Second, “how many of you have not been sued yet?”
As you can see, unfortunately we live in the most litigious country in the world with nearly 1.4 million lawsuits filed every year. That’s about 116,000 lawsuits a month; 3,800 a day; 160 per hour; or 2 1⁄2 lawsuits every minute!
Not to mention we have the most lawyers per capita: 391 lawyers for every 100,000 people living in the U.S. Compare that to Japan that has only 23 lawyers per 100,000, Canada which has 26 or France which has 72. And it’s not getting any better. It is estimated there are over 100,000 students in law school right now.
All this results in the unsettling reality that if you own a business or practice a profession you have a one in three chance of being named a Defendant in a lawsuit in the next year. And if you are a physician, that number goes up to around 40%.
This is why asset protection should no longer be viewed as a luxury or an option to consider, but rather smart business planning that has become a virtual necessity, just like any other form of insurance.
Why Not Insurance?
Insurance has traditionally played an important role in asset protection. And it should continue to do so. I always advise clients to use insurance as their first line of defense. But is it enough? The answer is quite simple: No. This is why, creating and implementing a sound asset protection structure is critical to ensure a back-stop in the event insurance under-insures or does not insure at all.
There are 3 main limitations with insurance. The first is underinsurance. A $1 million dollar insurance policy might sound like a lot until something catastrophic happens in one of your investment properties. A tenant slips and falls on your property, or a gas-pipe explodes rendering your tenant incapacitated or in some cases much worse. As you may have read, just a few weeks ago, an entire building collapsed in Pennsylvania http://www.cnn.com/2013/07/29/us/pennsylvania-buil.... Fortunately no one was killed, but rest assured lawsuits against the owner are forthcoming. Hopefully, the owner has more than a $1 million or even a $5 million insurance policy.
And what if you get into a car accident severely injuring a family of 4 in the other car. You will soon realize that your $1 million dollar policy isn’t worth as much as you thought and you are personally responsible for the excess damage.
The second limitation its the exclusions found in all policies.
With so many exclusions sliding into insurance policiesthese days, it is often the case that people pay their monthly premiums on a policy that ultimately will not insure them. This is the main reason I encourage all of my clients to have their policies reviewed by competent insurance counsel, so they know exactly what they are buying.
The third limitation is flat out denial of your insurance claim. Oftentimes, your insurance company contends that you failed to disclose risks during the application process - therefore your claim is rendered invalid based on these allegations. (This is a common result in health insurance applications when you fail to disclose complete medical history). In the latter 2 scenarios you end up spending a considerable amount of money hiring an insurance lawyer to battle with your insurance company to get the coverage you need.
The irony is – more often than not – the insured isn’t even aware of the limitations or loop holes thus gets taken advantage of and ultimately pays the price. However, the positive side is it’s preventable. It simply requires proper planning on the front end with a qualified team.
Goal of Asset Protection
The goal of asset protection is two-fold: to protect you from your assets and sometimes more importantly, to protect your assets from you. The former is more aptly called limitation of liability because it limits (or contains) the liability to the entity that is being sued. For example, if something happens to one of your businesses, investments, or properties - if properly structured - you can limit your liability to whatever is contained in that company and prevent the liability from spreading to other assets you might own.
But what happens if something takes place that is completely unrelated to your business or investments? For example, what happens when you get into a car accident and cause severe harm to the passengers in the other vehicle? What happens when there is a judgment against you personally for causing that harm? Well then our goal is to protect your hard earned assets from yourself.
These 2 goals must always be kept in mind when developing an asset protection plan.
Ultimately, we view the goal of asset protection to ensure that you get from where you are today, to where you want to go, as fast as you can without having any leaks that could set you back years and delay, and sometimes outright prevent, you from reaching your financial goals.
Hope this helps.
Mauricio Rauld
- Attorney · Nashville, TN · Member since 2015 · 1k+ posts · 1k+ votes7y
For single-member LLCs, you shouldn't be paying THAT much. It's probably around the $500 to $1k range (including filing fees) for most areas.
"Never LLC" is not a viable position if you intend to have partners/partnerships down the line. You'll be shocked how many people can seriously lose money by being a GP in a partnership. That is one concrete benefit that LLCs can provide that a partnership cannot. And the kind of liability you face is not necessarily something that is insurable.
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.
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