LLCs?

35 Replies

I'm looking to start buying and holding for rent. I've heard that it's wise to hold houses under LLCs for tax and legal protection. How does it work? Do I need to start an LLC for each house? Where can I find out more information? Thanks!

Hi @Chi Cheung ,

I am also new at BP, and I just created an LLC, mainly for legal protection for this moment.

I found this discussion about the benefit of having an LLC in this forum, and I remembered reading something about creating individual LLC for each house somewhere on the web. I believe the article stated the benefit of having an LLC for each house is to separate each house to multiple entity. So, in case you are getting sued by tenant in house 1 for outrageous amount of money, the tenant cannot get your other houses.

However, after further research, I also realized that you can also minimize your risk by using a good contract and insurance.

Donny

@Chi Cheung

It is not necessarily to set up one LLC for each unit. But then again if all your units are million Dollar properties. I will definitely use separate LLC for each.

If your properties are all $30K each. I do not see why you can't put 4 or 5 in one LLC. It all depends on you own comfort level.

Also do not put too many properties in one LLC, your accountant will thank you at the year end.

For @Donny Widjaja , there is an option in Texas (and some other states) to create a 'Series LLC' (https://en.wikipedia.org/wiki/Series_LLC) with one 'master' LLC and separate series/cells which can contain one property each, effectively indemnifying each property from the other. Before proceeding, make sure the lender you are working with will honor this structure. I hope this helps!

Kelly Marc Alston, Real Estate Agent in TX (#648082)
214-326-3425

@Chi Cheung Establishing an LLC for your rental properties is a great way to shield yourself from risk. As far as setting up multiple LLCs for each property I think that is a bit excessive and can also be costly.

I have recently been going through this process and I used a combination of an LLC and Land Trusts for asset protection. Each property would have its own Land Trust but they would all be nested under the LLC.

@Chi Cheung

The best place to find more information is to search here (BP) to get general information so that you know enough to ask intelligent questions, then speak to an attorney and accountant. Their advice will be specific to your state and your situation. There have been many discussions here about the benefits, or lack of, in an LLC.

Thanks everyone for the useful info so I know where to start reading more about this. I know I'm jumping the gun a little on this, but which state should the LLC be created? :-)

I have just met with 2 attorneys, one of which is a personal friend as I am looking into this very thing. I am in Tulsa, Oklahoma by the way. Both advised me to not mess with multiple llc and to simply leave the properties in my name. They said just form an llc to run the property management side and run the leases through that and then pay net proceeds to the owners, (myself). Both are accustomed to piercing the corporate veil and stated that without setting each up properly and then running them properly, you will get screwed by any competent attorney and it will be a lot of expense and hassle for nothing. They both referenced a matter that they said any tort lawyer would be familiar with, apparently it is a common law school topic. There was a cab operator in New York, yes, another state, but still applicable, that had a separate llc for each cab...insulating each. They were paper entities only as all the revenue was drained from each and paid to the owner. Eventually there was a wreck and one of the llc's was sued. Due to the fact that there were no assets, the cab was not run like a true business, it was not capitalized etc....just a shell entity for liability management, it was disregarded and all were opened up allowing access directly to the owner. An LLC can not be used for the sole purpose of shielding liability. In order to have a separate entity, it needs to be able to act as a separate entity. It needs capital reserves, it needs to have associated maintenance and expenses to run the entity etc. If you have each llc with sufficient capital, who knows exactly what that is, but for discussion, lets say $50,000 and insurance on top of that....ok, you are likely fine on the personal side...they just wipe out the llc....assuming of course they get judgement. Without that, you don't really have an entity and thus no liability protection. I am somewhat disheartened by this but must admit it makes sense. They basically said that if there is an issue and a lawsuit is filed, all parties will be named. After a period of time, as the legal process works itself out, each party can work to get released from the claim etc but no attorney will look at a property with a mortgage and just assume no equity thus no lawsuit. They will sue anyone and everyone and let the system prove who owns and owes what. and for those, like me, that assumed land trusts would amount to something, your first round of interrogatories will ask you to divulge (sworn testimony subject to perjury laws) all trusts that you benefit from and/or administer....there goes your big secret.

Any landlords out there that have been through this legal nightmare called a lawsuit that can attest or refute anything i have said?

I am curious and still trying to figure out how i will get things structured on my end.

Thanks

After extensive meetings with attorneys, I decided to form an LLC for the property management company only and run the business that way. Because I self manage, my protection is still limited by this. In terms of ownership of the properties....they are still in my name for the world to see and I will start moving them into land trusts por purposes of estate planning only. I have lots of liability insurance on each property in addition to a large umbrella policy through the same company that insures my primary residence and cars. That is WAY cheaper than insurance through a commercial policy that can cover real estate in the name of an llc.

Owning real estate is not near as scary and dangerous as people make it seem. People that have been in it long enough know this. It's the newbies that dream of the millions they will make that fall for the snake oil that gurus sell them about protecting the millions they have not made yet with costly, complicated, ultimately ineffective LLC filings that they can teach you about for $500+.

As you get clusters of properties paid off, or are past the point to which you can leverage conventional loans and can get enough scale to hopefully alleviate the premium increase to insure properties in an LLC vs your name, sure....put them in an LLC...I guess. Will I do that? Ask me after I buy another 30 or so.

Originally posted by @Dave Foster :

Good stuff guys but it even goes deeper into each state as it relates to the protection afforded by an LLC. Not all states protect assets equally or limit recourse in the same way.

Dave

Exactly. Not only that, but each state has variations on how much they recognize other state's entity laws. A lawsuit in one state against an entity formed in another can become a real zoo. 

Hi, I created an LLC in NY 6 years ago. Just go to the NY DOS website. You can do it online now. In NY, there is a publication requirement. I think you can get the newspapers down by Borough Hall. Costs 225 to incorporate. If a single person llc, it is a disregarded entity for tax purposes. I have some items I can share as well. The incorporation process is easy if you go that route. We had a property that was free and clear so having an llC made sense. But, you need to be properly insured as well.

FWIW, a couple of investors that I know with 10+ rental properties; all run individual LLC's for each property. Obviously everyone's situation is different and that is why you may want to consult with a mentor or a lawyer that has experience managing real estate transactions/properties.

Hi,

Does anyone know what happens if you create your LLC in a friendly state (say Nevada or Delaware), but operate it in your own state (that would be NY in my case) and get sued?

Which state laws applie to your LLC?

If you don't use a LLC to protect yourself, what would you consider a sufficient insurance coverage when using umbrella policies?

Thanks!

Yoann,

If you form the LLC in NV or DE and the LLC plans to operate in NY it must still register in NY as a foreign LLC. In this case you are going to have to comply with both state laws if they require annual reports or filings etc.

@Yoann Mamy Randriamihaja  

If you have the proper insurance in place it will be a nonissue.  Your state of orientation of the llc does not change the way your insurance policy reacts to a claim. 

The state and city where the claim happened are the laws that will apply. 

The level of protection is really whatever will help you sleep at night.  I was just with one of my clients this afternoon who has only a $1mil umbrella and he has 100's of locations in pretty rough parts of town.  I also have clients with less than 10 and have $2mil-$3mil umbrella.

Originally posted by @David Powers :

Yoann,

If you form the LLC in NV or DE and the LLC plans to operate in NY it must still register in NY as a foreign LLC. In this case you are going to have to comply with both state laws if they require annual reports or filings etc.

 Thanks David!

I'm not sure then what's the point of incorporating in a different state. Is there a tax advantage to it? I would assume that you still have to pay taxes in the state where you are working.

Originally posted by @Jason Bott:

The level of protection is really whatever will help you sleep at night.  I was just with one of my clients this afternoon who has only a $1mil umbrella and he has 100's of locations in pretty rough parts of town.  I also have clients with less than 10 and have $2mil-$3mil umbrella.

 Thanks Jason!

Based on your experience, what would you recommend as a safe policy coverage? Do you have examples of law suits that went over the umbrella policy? Do all policies cover legal fees or should we carefully look for that?

Originally posted by @Yoann Mamy Randriamihaja :
Originally posted by @David Powers:

Yoann,

If you form the LLC in NV or DE and the LLC plans to operate in NY it must still register in NY as a foreign LLC. In this case you are going to have to comply with both state laws if they require annual reports or filings etc.

 Thanks David!

I'm not sure then what's the point of incorporating in a different state. Is there a tax advantage to it? I would assume that you still have to pay taxes in the state where you are working.

There are no tax advantages to incorporating in one state over another.  This is more of a question for an attorney.  There are nuances and advantages to incorporating in one state over another, but many times it simply makes sense to incorporate in state you will operate in.

@Chris Simmons I am finding out exactly what you are talking about regarding LLC's. I'm in Tulsa too. I think I have decided to set up one LLC for the operating business and then put the individual properties into trusts. Would you be willing to tell me which attorney you are using to set up your corporate entity? I have been working with one here in town and would mind a second opinion.

The best place to find misinformation and non-expert opinion about legal entities (LLCs in particular) and land trusts is in this forum, as well as on the internet. Do yourself a favor - consult with an experienced business attorney. You'll be told it's wise to place each rental in its own LLC, or its own series within a series LLC. You'll also be told how ridiculous and pointless it is to use a land trust (there are only two legitimate reasons for using a land trust).

Many states allow a foreign (as in "created in another state") LLC to hold real property without having to file as a foreign entity in your home state. If that is the case in your state, then your least expensive bet is to form a Utah series LLC. It will cost you a $70 filing fee, and an annual renewal fee of $15. Unlike some series states, there is no cost for creating each series of said LLC. Because the series operating agreement is a separate document from the main operating agreement, and because a series is not required to file an annual report, series members have total privacy. Make sure you understand the limited type of protection an LLC provides (it shields its members from judgments resulting from lawsuits involving its assets). If you are sued personally for something you have done, you will have to disclose ownership of the LLC, and (since it is an asset you own) can be used to satisfy the judgment against you.

Do not bother with a land trust, it neither limits liability nor provides privacy, despite what seminar newcomers (who have never litigated these matters) will tell you.  If a tenant decides to sue for something, you'll have an interesting time explaining to the courts why certain structures are necessary (other than to evade process of service), and that will also call into question who is authorized to legally represent the land trust.  Once the trustee is ordered to appear, things get interesting as plaintiff's counsel requests trust documents, receipts and cancelled checks showing the trust was properly administered.  Under the Uniform Trust Code, certain states disallow trusts in which the grantor is also a beneficiary (and such trusts are void ab initio), but none of the seminar gurus want you to know this.  In addition, if I can't find you, I can legally serve you via publication in a local (to where the tort took place) newspaper.  Since you're unlikely to be reading the paper, I will soon have a default judgment against you, and by the time you realize it, you may no longer own the property you thought you did... thanks to your land trust.

If you actually want privacy and asset protection from the inside as well as the outside;

1) use a series LLC for each property, making sure to draft an operating agreement for each series, open a bank account for each series, have separate books for each series, and never commingle funds from each series.

2) have the series LLC owned (100% membership interest) by an intentionally defective grantor trust (IDGT) with no ascertainable standard for distributions (no HELMS), a bank or trust company (preferably in South Dakota) as trustee (starts at $2,500/year), a non-related (non-family) trust protector with discretionary veto powers over distributions, IRC § 541 provisions so it withstands federal bankruptcy, and many other details which are too lengthy and technical in nature to expound upon here.

As long as you have a $1M or $2M umbrella policy, you may be able to get away without having item #2, above.

Another good resource that could be helpful or at least give you some questions to ask your CPA and attorney (which I suggest you consult) is Bigger Pockets Podcast 109 - Gives you some ideas and gets you thinking.  Worth a listen.

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