Question? forming my company in the new year, We plan on consulting a experience lawyer in the real estate investing arena . Is there any questions or things you have done that you wish you knew before incorporating?
Read your state's LLC laws. The most involved aspect is not the formality of forming the LLC, but the Operating Agreement between members. The more detail you have about the business( operations, management, responsibilities, etc.) , the easier your task in defining the OA will be.
If you are forming an LLC for assets, protection thinks again it will not protect you. Get a good insurance policy.
@joeGore for that and more, and yes insurance is a must. And at some point an umbrella insurance.
@Abou C. there are some good reasons to use business entities in going into the real estate business. In my opinion it is malpractice to recommend a regular partnership anymore. The type of entity that will best fit your needs to be considered as some are better for buy and hold and some are better for fix and flip. All corporations if you observe the corporate formalities provide some liability protection, but keeping good insurance at high levels is a must in my book. An LLC does not protect you from suit, it helps protect you from only certain types of lawsuits by limiting the assets they can attach if things go south. To say they provide no protection is just plain wrong.
Here is an example. In a regular partnership you have unlimited liability for actions of a partner. So if you have a partner and on behalf of the partnership he incurs a debt of a million and the business folds you are personally liable for that million dollars. If you form an LLC, (which is really just a partnership with the asset liability protection of a corporation) your liability is limited to the assets in the corporation if you observed the proper formalities. A corporate entity doesn't help you win a lawsuit, it helps you limit your liability if you lose. I have done pierce the veil lawsuits, although none recently.
@Jerry W. Oh okay. Our business model is buy and hold for x amount of years then unload depending on factors. Long term our goals are to transform the business into a private equity firm to rise large enough capital and kick ***. Will not me easy and will take some years but doable with the right team and source of capital and of course success.
@Abou C. I would say one important thing is talk to a good real estate asset lawyer and an accountant. The reason is that sometimes the two viewpoints are conflicting, and you need to weigh the merits of both in making decisions. Both of them should be investors themselves.
Ask that asset lawyer exactly what exposure you will have when operating in an LLC and what protection you will have. My money is on his answer being quite different from what @Joe Gore said, and along the lines of what @Jerry W. stated.
I am not a lawyer, but I believe that a multi-owner LLC that is run properly will insulate against external liabilities effecting the assets. Internal liabilities (issues within the LLC such as an injury on one of the properties) must be insured against. But a properly run LLC CAN protect you against the liabilities carrying outside the LLC. It won't do that if your actions were criminal or negligent.
Having been sued in a slip and fall and having title in LLC recently I would say it is beneficial but more important is insurance at a high level. Also, think about issues like what happens if/when one of you wants to get out. What happens if one of you dies? I should also say that I had to apply for a loan for the LLC and I was honest and disclosed the pending lawsuit(it settled before the loan closed) but it made me think: what would happen if I was trying to buy a house and I owned the investment property in my name?
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