LLC or under your own name?
Banker · San Diego, CA · Member since 2012 · 15 posts · 6 votes
Hello BP world! I'm a newbie to real estate investing but not to investing in general. A little about myself, I'm a finance major and currently working for a bank as an investment associate/financial specialist. I bought my first investment property last year and am trying
To reap all its benefits including, but not limited to, depreciation of the property, rental income, tax deductions, etc,. What do most of you seasoned "buy and holders" believe is best in order to reap the most out of my rental property? an LLC or just keeping the property under my own name? Any advise/comments would be appreciated!
Personally, I were buying multi-family properties, I would go with the LLC. I would feel uneasy owning a lot of units in my own name. As for tax benefits, an LLC doesn't really provide that--if it's a single member LLC it's treated as a pass-through entity and just treated as ordinary income (minus the improvement/repair deductions and additions to basis you can take for rental property). I'm not sure if there's a tax benefit for a multi-member LLC.
Personally, I were buying multi-family properties, I would go with the LLC. I would feel uneasy owning a lot of units in my own name. As for tax benefits, an LLC doesn't really provide that--if it's a single member LLC it's treated as a pass-through entity and just treated as ordinary income (minus the improvement/repair deductions and additions to basis you can take for rental property). I'm not sure if there's a tax benefit for a multi-member LLC.
My accountant claims there is no tax benefit to an LLC, but there is a need to insulate oneself from liability. An LLC can accomplish that but he advised an umbrella policy instead. Cheaper, no annual reports.
When i started out a few years ago i formed an LLC with my partners thinking that was the way to go. Very hard to find financing to purchase properties then and now. The properties were titled and deeded to the LLC to protect it's members personal assets and limit our exposure. Expenses incurred with LLC will be start up fees, then annual fees paid to the state and fed gov't, much more then a general liability insurance policy will cost you.
Over the past year we began the refinance process on all our properties to reduce our terms and interest rates to half of what they were, none of the banks would refi us under current fannie mae/mac guidelines. We thought we could just change ownership out of the LLC and then back into it once the refi took place....found out how expensive and time consuming that was and if the banks/lenders found out they could call the loan due at any time.
In the end we dissolved the LLC to reduce our annual expenses, changed ownership on all the properties to the individuals, refinanced and bought insurance.
My suggestion would be to pose these scenarios to your lawyer and CPA and see what advice they give you. Good luck !
I definitely recommend getting an LLC to protect yourself. Many lenders will have no problem with you deeding the property to the LLC. I own 2 rental properties, one SFH and. quadplex. I used a Texas Series LLC. The loan is in me and my partners name, but the property is owned by our LLC. So we have a great 3.25% loan for 15 years.
My insurance, etc are all in the name of the LLC with no additional expenses. You just have to do thorough research and find the right bank, insurance company, etc.
Really? "...annual fees paid to the state and fed gov't..." What LLC fees do you pay to the federal government? BTW, LLC costs in NC, at $200, are less than hazard insurance payments for one SFR.
Larry K. it is up to you to learn about LLCs and if they 'fit' for you.
Regarding Jim's "In the end we dissolved the LLC to reduce our annual expenses, changed ownership on all the properties to the individuals, refinanced and bought insurance."
I looked up the cost of the LLC annual report in NJ. "The annual report due date for all businesses will be the last day of the anniversary month of the entity's formation in New Jersey. The annual fees are: $50.00 for profit corporations, LPs, LLPs, and LLCs" You did the right thing by dissolving the LLC. If the LLC can't afford $50, it really needs to be shut down.
The answer to getting cheap GSE money has been posted on BP elsewhere. No, you can't get loans in an LLC. But as an individual you can. Have your attorney add a deed to your closing to transfer the property to the LLC. Members of my comapny did this before and after the lending bubble. The great thing is that this is not prohibited by GSE underwriting. And per my attorney, this is "constructive notice" of ownership change.
On a refi, you can take a property from an LLC (via comapny resolution, deed it to a member and declare a distribution), the member gets a loan (signs the loan and D-T), then the member puts the property back into the LLC (via encumbered property contribution). See also Transfering title to LLC here on BP.
In New Jersey where we had the LLC formed we were subject to annual state fees of $150 per member, we have 5 members which cost us $750 annually. There was also a filing fee to set up the LLC ( I believe it was $125 at the time we formed ) and a $50 annual filing fee for the company's annual report. ( this was the fee i mistook for the Fed fee ) You are correct and my mistake as there are no fees for setting up the LLC with the IRS ( obtaining an EIN number ) but the state fees and annual filing fees proved too costly for us.
Also, we had a very difficult time finding financing and trying to re-finance the properties under the LLC, so in our particular case it worked out best for us to dissolve the LLC and transfer ownership to the individuals. Insurance costs for us were much cheaper in the end, especially when we already have walls in/walls out policies paid through our HOA dues. We invest in townhouses and condos and in some cases the HOA provides extensive coverage. The only other insurance we really needed was a general liability insurance policy which was not expensive at all when compared to
Now granted every situation is different and every state charges different fees so like i mentioned above check with your accountant or legal adviser for their input but make sure you run the numbers and find out what it will cost you to set up and file for each year.
In the end for our situation it proved cheaper and easier ( to refinance and purchase ) not being under an LLC.
Jim, thanks for the clarification. So, I guess the real question is are you going to lose anything by not having the LLC? In my case, since we do finance everything through the LLC (via a commercial bank) we need the LLC and its members to function.
Chris, I should have been a bit clearer up front also and as i mentioned every situation is different. I just tried to weigh the pro's and con's for our situation and what works for us. Attorney fees to transfer out of the LLC were very high, NJ also hit us hard for realty transfer taxes ( even though we transferred for $1 ) and we did not want to pay the fees to transfer everything back to the LLC again.
In the end the few dollars per month for the General Liability $1 million coverage per unit was much more cost effective for us.
Thanks everyone for all your comments I found them very useful. I began researching the costs in MA and the annual filing fees are $500. I have yet to see what liability insurance would cost me but does anyone know what would be covered under a general liability insurance policy ?
If this was your first deal and you don't have a lot of assets in your name then by all means buy it in personal name since you will get much more favorable finance terms and insurance costs.
But if you were thinking of accumilating many properties and if you didn't want to lose your personal house in case of liabililty then go for the LLC.
In CT, its well worth the llc cost if you have multiple properties and own your own primary home. Many even push to setup a separate LLC for each property to insulate each.
I believe in having an LLC as well as insurance. Even if you don't have much personal wealth, do you want the potential of one liability case to garnish you wages for life? A jury could and have awarded tenants judgments over the typical one million dollar insurance policy. Personally, I sleep better at night knowing I have protection from both an LLC and an umbrella insurance policy.
this is yet another reason why a tax person n lawyer shud b consulted based on ur strategy... then review w experts as needed when/if strategies revised.
we run an llc n the costs here r 800/yr just to keep it going and about another 1500 for tax guy. once we have a prop in the llc, we'll see what the liability coverage is.
the previous props i am invested in, however, r under my name... but then again, theyre low risk n manageable bc they r done within the family.
good questions to seek answers for ur situation... and definitely better left to consult the professionals than a general response from the forum.
just my humble $0.02!
All of my properties are in my name, however I have taken on a partner for new endeavors and the best way we have found to show joint custody is through an LLC. Loans and purchases are still in the individual's name and we are filing a deed transfer once we have the properties to the LLC's name.
this is yet another reason why a tax person n lawyer shud b consulted based on ur strategy... then review w experts as needed when/if strategies revised.
we run an llc n the costs here r 800/yr just to keep it going and about another 1500 for tax guy. once we have a prop in the llc, we'll see what the liability coverage is.
the previous props i am invested in, however, r under my name... but then again, theyre low risk n manageable bc they r done within the family.
good questions to seek answers for ur situation... and definitely better left to consult the professionals than a general response from the forum.
just my humble $0.02!
Correct me if I'm wrong, but in addition to the $800 minimum franchise tax, aren't LLC's also required to pay a gross receipts tax in CA? Example, if you buy a property for $500,000 then sell it for $500,000, you pay tax on the $500,000 gross receipts you received ... even if you lost money overall. Actually, I think they call it a fee, a tax would be illegal:)
we got into an LLC for varied reasons... primarily to hold property, but real use have been for various venture experiments in tech n contract work, so we have not had the opportunity to find out about that surprise fee u speak of. we got into an LLC by the repetition of advice heard from seminar world... n our legal n tax recommended it for holding rentals. pre2007 housing market "correction" ;) we were actively seeking multi fam apt 120+ units class c in Houston n Dallas. after becoming proficient n familiar in our target areas the market turned n we were spared the hard knocks tuition of that market correction. however, that said, we were categorically in commercial AND rental rates post 2007 shot up...so maybe we missed an opp? anyway... we packed up our search n have stuck to our comfort zone in where we come from (technology field).
fast fwd to 2011, I'm focused on sfr n residential mkt (4u)... the current consideration has been flip n according to a CPA re investor, he's told us LLC is not a good vehicle for flip biz, but good for buy hold biz.
after about a solid 9mos of gettg familiar w the residential side of analysis etc, I'm now figuring out the ideal strategies n what order to pursue. I have a clue,nbut need to vet the process/considerations of approach.
sorry for the ramblings :) long story short... I ddnt know bout that special fee :) fun... will investigate as needed.
see? one more reason to consult the pros!
I started out in the SF arena and moved to multi-family a year ago. all the advice I got pointed to having single asset LLC's for each investment. I also tend to partner up with other investors these days, so the LLC works really well.
The one issue with LLC's is that in order to ensure that the corporate veil is maintained is to ensure the requirements of the LLC are covered every year, and that the LLC is set up correctly. I heard a stat recently that 95% of LLC's would not hold up in court, and would be treated as a partnership by the courts if a lawsuit was filed. A good lawyer can tear down the LLC pretty quickly if everything is not set up and maintained correctly.
The following came off a checklist a got from a lawyer who specializes in LLC's:
1. Have you read and do you fully understand your
Articles of Organization?
2. Have you fully executed and filed your Articles of
Organization?
3. Have you appointed the appropriate members and
managers of your company and had them sign the
appropriate documents?
4. Have you issued Membership Interest Certificates?
5. Do you have a ledger of your Membership Interest
Certificates?
6. Are you holding your annual meetings?
7. Have you given appropriate notice (and kept copies)
of the Meeting of the Managers?
8. Have you kept proper and adequate minutes for the
annual Meeting of the Managers?
9. Have you adopted the Operating Agreement for your
LLC?
10. Do you understand what is covered by the Operating
Agreement and what protection it gives you?
11. Has the LLC secured a Federal Tax ID number from
the Internal Revenue Service with proper address? (May not need to if disregarded entity)
12. Have you made the proper tax election (S Corp.,
Partnership, etc.)?
13. Is your LLC legally doing business in other states?
If so, have you been sure to file all necessary filings in
those states that your company is doing business in?
14. Have you made the appropriate resolutions of the Managers
to authorize and document all major company acts?
15. Have you kept separate books and bank accounts for
the company and yourself, making sure at all times
never to commingle any funds?
16. Are you sure that your tax returns, books of account,
and company records all say the same thing?
17. Are you sure that you have properly documented all
transactions between you and the company, with
resolutions, minutes, etc.?
18. Was your LLC properly capitalized?
19. Have you executed every document that you have
executed on behalf of the company as its manager/
member, to guard against personal liability?
20. Have you documented all major transactions of the company business with resolutions, notes, contracts, etc.?
21. Do you have a resolution documenting the business
purposes for any questionable deductions?
22. Are you current on the above formalities and paperwork?
If you're behind, do you know how to catch up?
23. Has your LLC adopted an expense account form for
official company use that meets IRS guidelines?
24. Does your LLC have an actual physical address, and
the cancelled checks to prove it?
25. Does your LLC have a phone in its own name, and
cancelled checks and statements to prove it?
26. Does your LLC have its own business license?
27. Does your LLC have its own bank account?
I'm not saying that everything in the list is required, however the lawyer that gave me the list says that by making sure you've covered all 27 points there is little chance that even the best lawyer will be able to tear down the corporate veil and expose you to liabilities as a partnership.
One of the biggest issues that I've seen is a properly drafted Operating Agreement. If yours is less than 20 pages it's probably inadequate.
Cheers,
Marc
Clint Coons, who has contributed great articles on Bigger Pockets, has a blog post that address' a possible way for CA investors to avoid this. Is a great read at: http://clintcoons.wordpress.com/2012/05/11/for-california-investors-the-solution-may-lie-in-nevada/#comments.
If you are not a fan of copy and pasting web pages, you can find it by googling Clint Coons Blog and find the article, "FOR CALIFORNIA INVESTORS THE SOLUTION MAY LIE IN NEVADA".
Im not a attorney that does asset protection nor am I a tax professional but let me tell where my answer comes from. I studied large landlords that owned hundred of properties and watched how they titles property. I also have a friend that is an attorney that we discussed the matter of liability and corp structure for the matter of asset protection and personal liability as a result of owning such assets.
Being a landlord of over 20 years and have over 100 unit gives me a little personal knowledge on the matter too.
The answer is your llc should not be in any form of your name if you plan to avoid liability which is a big reason why we use llc's to hold real estate. Another trick I learned is to use the name of the address of the property when naming your llc. For example if I own a property on 123 main street. I would call that 123 main llc. Or lets say you own a property on 403 32nd street the llc would be 403 32nd llc. this is what I do and when you get a large business like I have it makes it a lot easier when the file folder has the address and your not trying to figure out what that llc is called when your banker asks for the name and llc ein number over the phone or title company when your trying to sell to an end customer. It also makes your secretary happier when managing your affairs if you get to that point.
Good luck, thats my 2 cents on the matter..
Clint Coons, who has contributed great articles on Bigger Pockets, has a blog post that address' a possible way for CA investors to avoid this. Is a great read at: http://clintcoons.wordpress.com/2012/05/11/for-california-investors-the-solution-may-lie-in-nevada/#comments.
If you are not a fan of copy and pasting web pages, you can find it by googling Clint Coons Blog and find the article, "FOR CALIFORNIA INVESTORS THE SOLUTION MAY LIE IN NEVADA".
Good article. I've heard this before from a land trust guru. I wonder if saving $800/yr makes is worth running an out-of-state entity and land trust. The $800 is a minimum, if the entity makes enough the tax would have to be paid anyway. Although the article didn't say it I presume the structure would also avoid the CA gross proceeds fee on LLC's. Maybe I'm a worry wart but I can't help but wonder if the people's republic of CA would, if they discovered the LLC's interest in the Land Trust, access the tax anyway.
The structure does pretty much require the authors service including setting up the land trust, llc, and office suite ... by the time you get done it's not clear there is much savings.
Good article. I've heard this before from a land trust guru. I wonder if saving $800/yr makes is worth running an out-of-state entity and land trust. The $800 is a minimum, if the entity makes enough the tax would have to be paid anyway. Although the article didn't say it I presume the structure would also avoid the CA gross proceeds fee on LLC's. Maybe I'm a worry wart but I can't help but wonder if the people's republic of CA would, if they discovered the LLC's interest in the Land Trust, access the tax anyway.
The structure does pretty much require the authors service including setting up the land trust, llc, and office suite ... by the time you get done it's not clear there is much savings.
David, it is probably not worth it for one entity. But if you have multiple properties it might make sense. It might even make more sense if you incorporate a series LLC with it. I would assume the structure would also avoid the CA gross proceeds fee on LLCs since it is the land trust, not the LLC, running the business.
Setting up a land trust, LLC and mailbox are pretty straight forward. Not sure why you would assume you would be required to use the authors service. On the other hand, he is a competent real estate attorney, so it might be a good idea.
Chris: Good point about the multiple entities. I was referring to the cost of A office suite service, not necessarily author's service, I'm sure he is competent.