Should I set up LLC before or after purchase?
I'm in the processing of buying a rental property. I'm thinking I want to set up an LLC, but the law firm we're using is very busy, and it will probably take a couple weeks for them to set it up. Originally I was planning on setting up the LLC during closing, but now since it is taking so long, I am thinking about buying the property under my own name, and then adding the LLC later. My self and the seller want to close the deal ASAP.
My question is, are there any additional cost involved if I buy the property under my name and then add the LLC later vs having the LLC from the start?
When it comes to ownership at closing it does not matter as much. It really comes into play before you get tenants. The only major cost would be quit claim deeding it to the LLC once you are set. As for setting up an LLC, depending on your state's requirements, it can be super easy and only take an hour or so.
Quote from @Michael Maliszesky:
Transferring the property from your personal name to the LLC requires a Quit Claim Deed. It's fairly inexpensive and can be done yourself, maybe $100. Call the County Clerk and they can explain the process and cost.
An LLC is useful for two things: anonymity and legal protection. In most cases, neither is warranted.
Warning: I am not an attorney and this can be a complicated topic. Please note the information provided below is a layman's definition designed to provide a basic understanding for the general audience. You should consult an attorney or CPA for your specific situation.
ANONYMITY: When you create the LLC, your name is recorded on the documents and published on the Secretary of State website for all to see. So you're not completely anonymous. If you want to be completely anonymous, you can use a Registered Agent. The Registered Agent will record the documents on your behalf so only their name and information appears on the documents. I've done this with my properties because I'm well known in my small town and don't want people to know what I own.
LEGAL PROTECTION: By placing your assets in an LLC, you are legally separating them from your personal assets. If someone injures themselves and sues, they will be suing the LLC and not you personally. If your insurance coverage isn't enough, they could seize the LLC assets, but not your personal assets.
Additional thoughts:
1. An LLC is not free. You can spend as little as $100 to form an LLC, or you could use an attorney and spend $1,000 or more. There are also additional costs of operating and maintaining an LLC, like separate bank accounts, annual report filings, tax filings, etc.
2. There are rules to follow! If you fail to follow the rules, you may open your personal assets to a lawsuit. An example of this would be mixing your personal money and LLC money in the same bank account.
3. You do not need a separate LLC for each property or a series LLC! Don't make your life more complicated than it has to be. Most professionals will recommend a separate LLC for every $1 million in assets but I don't think that's necessary. In my case, I have residential rentals in one LLC, commercial properties in another, self storage in a third, and my real estate company operates in a fourth. Some have more than $1 million in equity while others have less.
4. The need for an LLC is grossly exaggerated on BiggerPockets and other websites. Have you ever heard of a Landlord being sued by a Tenant and losing property? I've been on this board since 2010 and haven't found an example yet. You've probably heard of big Landlords losing property, but only because they were flagrantly violating Fair Housing, running a slum, or otherwise violating the law in an egregious manner. You are more likely to be struck by lightning twice. The vast majority of lawsuits against Landlords are for wrongful eviction, security deposit disputes, and Fair Housing Violations. Your basic insurance policy with $300,000 in liability coverage should be sufficient in 99.999% of all lawsuits.
5. The best protection for you and your investments? Know and obey the law. I manage around 400 rentals with 12 years experience and have never been sued once. Even if I were sued, I document everything and obey the law, so I won't be found guilty. Even if I were found guilty, the cost would be in the thousands, not in the millions. Insurance would cover it, I would pay the deductible, and no assets would be lost.
If you are in an area like San Diego where people are more likely to sue, a judge is more likely to find you guilty, and the payout is likely to be higher, then you may consider an umbrella insurance policy. This policy will provide additional coverage above what your existing policy covers. It's easy to obtain, costs very little, and doesn't require additional, on-going effort to maintain.
I read this - I am not a lawyer, please consult with one before you make a decision. From this Website.
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#3 BRRRR - Buy, Rehab, Rent, Refinance, Repeat Contributor
- Investor
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Before
@Michael Maliszesky, Hi. There are very competent, real estate friendly CPAs in Biggerpockets that specialize in entity formations and work with clients remotely. Reach out to one that is a better fit.
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CPA Florida (#ACC44844)
- FAS CPA & Consultants
You can do either of these things without an issue. Closing in the LLC is probably the cleaner and more cost effective option if you can complete it in the time frame that you described. You should, however, hire an attorney to create the LLC if you can. This will ensure that you have the entity formed correctly but additionally will provide you with an carefully created Operating Agreement that addresses the ownership and other necessary details related to the LLC.