HAVE to have LLC, Accountant, and Lawyer?

Question

Hey all,

So I have four purchase agreements for out of state property that I plan on closing. In your opinion, how necessary is it to have an LLC set up? How about getting an investor friendly accountant and lawyer?

I am sure people do deals all the time without one or all of these components, but at the same time I know their are benefits to having these as well. Thanks again!

Tyler

William Baumann · Answer

It depends on what your plan is?  Wholesale, rehab and sell or buy and hold.  If you just wholesaling you can get away IMO without a LLC.  If you doing a rehab and sell or buy and hold, you should look at getting an LLC setup for each property.

You have to understand the point of setting up an entity like an LLC. It is to protect your personal assets from lawsuits against your business activities. So for example, lets say you purchase all 4 properties for flipping.  All 4 are done and 1 gets sold. All are under your personal name.  The new owner of the 1 property you sold sues you because of termite damage in the roof, just an example, and they sue you for repairs, damages and failed disclosure.  Their suit is for $15,000 for repairs, $100,000 for damages, and $50,000 for failed disclosure.

Lets just say they win in court, that is $165,000 judgement against ALL your assets in your name. That means that they can come after not only the property you sold them but also the other 3 properties, as well as all your personal assets that are in your name too (bank accounts, retirement accounts, your personal home ,cars, etc.)

Same scenario, but this time you have an LLC for your business and each property is in it's own LLC. They get the same $165,000 judgement against you, they can only go after the property that is in the LLC for their property, the one you sold, and or your business LLC.  They can't come get any other assets to fulfill the judgement. Not your personal home, cars, bank accounts, nor can they get at the other 3 houses as they are in different LLC's.

Setup like this, in the worst case scenario, you would file bankruptcy in your company LLC and start a new one.

So, do you really need to do this?  Is this a real risk?  Maybe, maybe not.  But people like to sue for everything and anything these days no matter how ridiculous it is.  Remember the McDonald's coffee lawsuit?  Need I say more? Just as your job is as an investor, some people made a job out of suing unprotected people.

Shawn Thom · Answer

Just remember, one good piece of advice from an accountant or attorney can easily save you thousands of dollars.  I learned this the hard way.

Tyler Haskell · Answer

@Steve Vaughan

Thanks for the input. I had never thought of forming an S corp as a managing company, seems like a good way to keep the books under one umbrella. Thanks again!

Steve Vaughan · Answer

If buying 4 separate single-families and obtaining separate mortgages on each, no.  I would just buy in the name of the borrower.  Borrowing and insuring sfrs in the name of an entity will cause a lot of extra time, effort and headaches.  I own my multi's over 5 units in LLCs.  The commercial lending and insurance market expects that.  What you might do is establish a mgt co for your properties.  I have mine in an S-Corp. All rents and expenses for your rentals can go into and come out of that acct.  Helps keep the bookkeeping and taxes more manageable.  Good luck @Tyler Haskell !