I need the LLC basics

13 Replies

I have spent the last couple of days going through the forms reading about LLC's as they pertain to real estate. My wife and I have already decided to start one, and we have sent the papers to the state. Having been a property and casualty insurance agent, I understand the liability side of it. (Or at least I think I do.) However my questions are more basic then that, I'm wondering where do I find the rules? How do I operate the LLC? What do you mean by real income versus passive income or what ever the different types are? How do I move a property under the LLC? How do I pay my self? As you can see there are many questions, and I can't find a good source of information to help me answer them, any advise would be greatly appreciated. My wife and I want to do it the right way, and not just fly by the seat of our pants. We are looking for the nuts and bolts, great I now have this how do I use it?

Great questions. Looking forward to the responses!

Alriight, how about this. For those of you with an LLC what are some of the lessons learned? What are some of the dues and don't?

The rules for your LLC are in Texas state law. Google "texas statute limited liability company" for resources (like http://www.statutes.legis.state.tx.us/?link=BO and http://www.statutes.legis.state.tx.us/?link=BO) Another good resource is the book "How to Use Limited Liability Companies & Limited Partnerships" by Garrett Sutton. I'd suggest you read it cover to cover once quickly without interruption and write down questions as you have them. Just the questions. Then start at the beginning with pen and paper in hand. You will find the answers... write them down as you find them. On another piece of paper, write your second list of questions. You can also do the above with state statutes.

Regardless of your structure (LLC, C-Corp, etc.), always keep the company completely separate from you.

See also:
http://www.biggerpockets.com/forums/51/topics/106724-using-an-s-corp-and-an-llc-together--rental-real-estate
http://www.biggerpockets.com/forums/109/topics/105222-llc-question-and-management

Thanks, I look forward to doing the reading.

@Matthew Gutting There is nothing magic about doing business under an LLC form. It is merely a legal arrangement, like a sole proprietorship, partnership, or corporation. They each have different tax and liability advantages.

A sole proprietorship is when you do business under your own name or a DBA that is not a separate legal entity. You get taxed individually and you have unlimited liability, meaning that your creditors can come after your personal assets.

A partnership is like a sole proprietorship, except that there is more than one person involved. You are taxed directly and you have unlimited liability for the partnership's debts. That means, if your partner runs up debts in the partnership's name, you are responsible for them personally.

At the other end of the spectrum is the C-corporation. In a C-corporation, your liability is limited to the value of your shares. But the corporation's income is taxed and then dividends to shareholders are taxed again.

LLCs were invented to give businesspeople the liability protection of a corporation with the tax advantages of a sole proprietorship. Thus, your liability is limited to the value of your shares in the business, as in a corporation. But you are only taxed as an individual, as in a sole proprietorship or partnership, so there is no double taxation, as with a corporation. Just make sure that when you form the LLC, you check the box that says you want to be taxed as an individual or partnership, as the case may be. (The LLC itself, however, will have to file its own tax returns, so there is a cost associated with forming and running and LLC.)

Now, in terms of properties, you should have each property under its own LLC. Banks will often require this. (It's know as the single-purpose rule. Each property must be owned by a single purpose entity (SPE) that owns only that property and nothing else.) You may also want to have a separate LLC for your promotional company, and to hold your membership interests in the property-level LLCs. (Some people even take it another level, where they charge a management fee through one LLC and hold their membership shares through a second LLC, but the costs go up as each LLC must file its own tax returns, etc.)

The entity form you choose is really only the beginning of your concerns. The most important thing is to make sure you have a good accountant! And be sure that you keep good books, or your year-end tax reporting will be an expensive nightmare! If you cannot do bookkeeping yourself, then look into outsourcing it -- you can get cheap, reliable bookkeeping help in India, through such companies as Brickwork.

Hope this helps!

JDT

Medium tb logo 130211 finalJonathan Twombly JD, Two Bridges Asset Management LLC | [email protected] | http://www.twobridgesmgmt.com | Podcast Guest on Show #172

@Matthew Gutting - Matthew, I am no attorney or CPA, but your frustrations and questions with the LLC is a large part of the reasons that (in my humble opinion), newbies should not waste their time on this stuff. Get yourself insured adequately and go make some money. LLCs, entities, business plans, marketing plans, executive summaries, websites, etc, etc, etc, are NOT NECESSARY in order to make money in this biz.

It does, i didn't know any of this,

"Now, in terms of properties, you should have each property under its own LLC. Banks will often require this. (It's know as the single-purpose rule. Each property must be owned by a single purpose entity (SPE) that owns only that property and nothing else.) You may also want to have a separate LLC for your promotional company, and to hold your membership interests in the property-level LLCs. (Some people even take it another level, where they charge a management fee through one LLC and hold their membership shares through a second LLC, but the costs go up as each LLC must file its own tax returns, etc.)"

This is the kind of stuff I need to learn before going to much further down the road. i would never have thought that you would have to file for a different llc for every property that you own. What a nightmare, especially since i want to do the buy and hold. Not to mention very expensive. What if the property is bought out right and not financed through a bank?

Thanks

Matt

Originally posted by @Bryan L. :
@Matthew Gutting - Matthew, I am no attorney or CPA, but your frustrations and questions with the LLC is a large part of the reasons that (in my humble opinion), newbies should not waste their time on this stuff. Get yourself insured adequately and go make some money. LLCs, entities, business plans, marketing plans, executive summaries, websites, etc, etc, etc, are NOT NECESSARY in order to make money in this biz.

I was told this by a broker as well, and I'm insured to the gills when considering what little assets I do have. I have considered going down this road, and still may do it. It's just the thought of being sued is not that great, and getting sued these days is not hard. I just want to make sure that i provide every protection I can for the family even if it is a pain.

I am new to real estate investing personally although I practice real estate as I have a realtor license. I formed an LLC for all my investment properties and not for each one. I do have an accountant and he said you could do it either way (one LLC per property or one LLC for all my investment properties.) I have several clients who are landlords but do not have LLCs and they have been doing this for couple of decades. My suggestion is get an LLC formed and you can hold all of them under one LLC which is what I am doing. If you finance properties then the challege will be to find lenders who will let you hold the property in LLC. I believe portfolio lenders and small local banks allow you to do it. So far I have bought 3 properties paying cash but will start financing once I have nailed down a good lender who will allow me to hold in LLC. Connect with me and hopefully I can tell you what my experience has been so far. Glad to share my knowledge and experience.

the SPE is certainly a rule although I've heard not all banks follow the rules. It is often gotten around by transferring title into the name of your LLC after closing. This is typically an issue with traditional financing - the risk with doing that is that the bank will call your loan.

As for not needing an llc and trusting insurance.. I cringed as I read that, I truly respect my agent and know that he isn't trying to get one over on me, but I also know there are pages of exclusions in most insurance contracts. And then God forbid you ever need to file a claim expect to wait up to five years to get your next home owners policy or pay crazy additional rates.

Personally I use a combination of llc's and insurance. I started with one llc and insurance, I am looking at adding additional llc's for asset protection and privacy as assets grow (unfortunately I don't need more yet).

As for the hassles, I second reading Suttons books but I would also suggest looking at the cost of hiring an llc company/ firm to manage the "administrative" side of things including meeting minutes and annual filings and other crap. Depending on where you live, and the amount required by the gov you might find the costs to be low on the cost vs pain in the *** scale.

I hope no one thought I was advocating forming a million LLCs. It's not necessary, and it will cost you money. However, it is important to operate through at least one LLC, to provide the personal protection of your own assets. Relying on insurance is not sufficient because, even if a claim is covered, the award may exceed your insurance limits, and then you will be on the hook for the rest.

You also want to be very careful about messing around with an SPE. Often times, if you have a non-recourse loan with "bad boy" carve outs, impairing the single purpose nature of the SPE can trigger the carve outs and convert the loan into a full recourse loan. This is definitely something that you don't want to happen.

Medium tb logo 130211 finalJonathan Twombly JD, Two Bridges Asset Management LLC | [email protected] | http://www.twobridgesmgmt.com | Podcast Guest on Show #172

@Matthew Gutting look up Series LLC it allows you to setup a series of LLCs

each of which is theoretically protected from liabilities arising from the other series.

I will check with my finance company and see what they say. It's sounds like this is a rule some banks use and some don't I will certainly be upfront and honest with them, and let them know what I'm trying to do. They too may have suggestions. I will also look into the Series LLC, that sounds like something I need to learn more about.

Now, once we get that all straightened out, I'm assuming that all the rent checks would then need to be made out to the LLC, and expenses would have to be paid by the LLC. Because I read that you want to keep you personal finances and LLC finances separate. Is that correct?