Trying to figure out if my two partners and I should form an LLC for the deal we are currently in escrow for which is a 4-unit cash flowing property. I would be fine without an LLC but both of my partners have substantial assets in their personal names, and I do not want to put their assets in jeopardy if anything were to happen in the future.
We discussed getting an umbrella insurance policy, but still not sure which would be better for our situation.
1. Who do we talk to about forming LLC and if in our best interest? Real estate attorney? CPA? Grandma?
2. Does an umbrella insurance policy provide the same asset protection as LLC?
3. If we formed LLC after we close, what is best way to transfer from our personal names to the LLC without triggering the "due on sale" clause.
Still in the learning phase in all of the this asset protection talk, trying to read and take in as much info so we can make an informed decision on this topic.
Please help. Stressing over here! :)
These are great questions and really should be asked of a qualified real estate attorney in the area where you are buying the 4-plex. You are going to get split opinions on this site about asset protection with many telling you LLC is the only way, and others telling you umbrella insurance is all you need.
I'm not an attorney, but in my opinion if you want to have the building in the LLC, trying to transfer it after the fact can be messy, so best to do it ahead of time. If your partners have substantial assets and you have more than one partner, I think that getting an LLC makes the most sense because this will solidify the partnership and lay out how the partnership will operate for all aspects and situations that could come up over the lifespan of the property ownership.
1. Yes, talk to all of them but especially talk to an attorney that specializes in business entities. He may (and should) also be familiar with RE deals and asset protection. Only this type of specialist will be able to set up the LLC to address concerns you have not even thought about like, what if one of you dies? You may like your current partners but do you want to be partnered with their wife or kids. Or with one of their creditors?
2. NO! Insurance probably provides adequate protection but definitely not the same level of protection as a properly set up and maintained LLC. Because this is a partnership deal I would use an LLC anyway.
3. There is NO way to transfer the beneficial interest without violating the due on sale clause. I am not sure how you are planning to structure your financing since this is a partnership but if you have to use commercial financing anyway, this will not be an issue. They will prefer to lend to the LLC with everyone's personal guarantee.
I would also mention that talking to both a CPA and an attorney would allow you to make sure you're picking a tax-advantaged strategy as well as protecting your assets.
Create Lasting Wealth Through Real Estate
Join the millions of people achieving financial freedom through the power of real estate investing