FORMING AN LLC: Prior to contract or during closing? Advice please...

6 Replies

Hello All! 

Happy St. Patty's Day!

I am in the market for purchasing another multifamily property, but this time I would like to consider the possibility of rolling it under the protection of an LLC. This leads me to my main question - should I form the LLC prior to even having a property under contract or wait until I have a subject property identified?

I'm trying to think in terms of speed of sale. I'm not quite sure if organizing an LLC would prolong the closing process or if they are quick and easy to establish...

Also, I would have to go through commercial financing if purchasing through an LLC, so maybe even wait until after closing? However, I've found a commercial lender in my area that has terms that are fairly comparable to that of a residential mortgage.

Any insight would be greatly appreciated!

Its cheaper if you can buy under the LLC because if you put it in your name and then transfer to he LLC you will be charged a fee. Buying my properties under the LLC did not prolong the closing process at all. Then again I bought all cash. Maybe if I had gotten a loan from the bank it would have took longer. Some people I know get a hard money lender and then refinance after like 6 mos in order to pay a lower rate. In my state though they told me that my LLC would only get a commercial loan for properties 5 units and up anything under that is residential. You might want to recheck that.

Forming the LLC takes no time, so that would not prolong the process. It should be done now because I'm not sure that you can enter contracts to purchase something as an entity that doesn't exist.

It might make your borrowing more difficult. If you're getting a loan, you should start talking to small banks in the area, and talk to them in person. Have numbers ready showing that you know what you're doing. If it sounds like one of the banks is willing to work with you, form the LLC, make the offer, and move forward.

I had two mortgages under my LLC within 6 months of forming. The first mortgage was within a month or so of forming...and the second one was a couple months later. You may have to personally guarantee the loan, which means if your LLC defaults, they can still come after you for the money.

All banks are different. My bank considers any mortgage loan to a business as a commercial loan. My LLC needed to put down 25%.

**Before you form your LLC, establish your business mailing address! If you don't do this, you'll end up using, what?, your home address....and that'll be on the public records forever even if you make an amendment. I don't know about you, but I don't want my personal home address linked to my LLC for people to look up. You *can't* use a PO Box for this. It's more expensive, but your best bet may be to set up a UPS box first. Then use that to establish your LLC with its business address.

Get your ducks in a row, the LLC needs to be registered prior to contracting so that the contract is made in the LLC name. At settlement, you will need the registration and a statement from the Secretary of State that the entity was properly registered, a Certificate of Good Standing, that the proper fees have been paid and is free of any encumbrances, liens, claims, pending actions and I doubt you can get that "at settlement". It will only take minutes on line, but title companies usually don't act in matters of forming business entities, and there is more.

Contracting prior to forming an entity means the liability offered by the entity will not extend to that contract, it is personally made. Your contract is part of settlement and your title policy and settlement functions are based in that contract. A title policy to an LLC that didn't contract may not cover part of the title coverage that may extend to the contract.

Not saying that a property can't be set over into a LLC later on, that is a contribution to the capital account and taken in after the acquisition.

Financing can be more difficult, you'll need that certificate of good standing for the lender too, copy or the Articles and your Operating Agreement as well as consent of the member to bind the LLC in that transaction. A new LLC, you'll be giving a personal guarantee anyway.

If there are other expenses to account for, your LLC needs to pay those in keeping with good accounting form, not comingling personal funds with LLC accounts. You'll need insurance, pay taxes, settlement fees and all are then carried as the cost of acquiring the property. You need a bank account for the LLC!

To obtain a bank account, you need a tax number, request that from the IRS, you'll need that Certificate of Good Standing again. Need to show your authority to sign on the account.

Business licenses? If your city or county requires one, you'll be operating illegally if you failed to be properly registered. If the LLC is operating illegally, everything it does can have legal issues, things can unravel.

Take a full day to get your ducks in a row before you leap. Good luck :)   

Be sure to check with state laws if you plan to transfer it after the sale, as PA considers transferring a property into an LLC a transfer of ownership, and therefore comes with a transfer tax. If financing, the lender can also claim the loan amount due in full. If financing under an LLC, it is usually considered a commercial loan, so the rates aren't as good.

We buy our properties through entities and name the LLC or LP as the property address, therefore waiting until we find the property.

Wow! Thank you everyone for your input. There's a lot of great information here! 

@Bill Gulley

Thank you for the heads up about transfer tax! That is definitely something worth looking into..

@Stephen G. I used Rocket Lawyer to form one of our LLC's and did the last one myself, so that's easy to do. An attorney can charge you up to $2k for something you can do yourself. The conversation you need to have is with your lender and title company, but do your own research and look online for LLC operating agreements to see the lingo.

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