Four rookies wondering to LLC or not to LLC
New to Real Estate · San Bernardino, CA · Member since 2021 · 4 posts · 3 votes
Four rookies wondering to LLC or not to LLC
Most Popular Reply
Morris County, NJ · Member since 2020 · 5k+ posts · 2k+ votes
4yhttps://www.biggerpockets.com/...
Let me get you started with the post above. That should give you a good primer on LLC's. In your case, you have the best/main reason to form a LLC as you are investing with non-spousal partners.
In your case, its necessary since you need, or should have, to have "all" your options/contigencies figured out in advance. Usually, a lawyer can help you with that when drafting your Operating Agreement. This avoids messy arguments and complications down the road. Also, LLC entity will also be able to formally apportion your tax liability. For example, are you guys doing a 4 way split? Some other split? Will it be variable?
These are the main issues. Otherwise, investing with a legal entity does not provide any additional tax benefits. for "regular" residential investments, the maintaining the limited liability aspects can actually confound and/or make it prohibitively expensive for a single investor to do. For example, legal entities such as a LLC are not eligible for conforming residential loans. You have to use commercial financing.
All this being said, it does depend slightly on what sort of investing you are looking at doing. You might want to try one deal with out it to see how you guys like it, will it work out, etc. Or, form a LLC but don't go crazy (don't spend too much setting it up) to find that you guys won't stick with it.
Again, its depends on what you are doing. You might find that a nested set of LLC's is to your advantage or liking. For example, each of you creates their own single member LLC. Then, you form a a multi-member LLC using your single member LLC's as the owner. Allows for each of you to maintain your own branding/marketing since you have a static LLC. The multi-member LLC could be formed for each deal. This can be advantageous as maybe for a deal only 3 of you want or are ready to go in on it. Maybe you want a different split or a different set of business conditions. This can all be taken care of cleanly in your Operating Agreement. Sure, it can be done with a "regular" LLC formerly described, but you'd have to update/amend your Operating Agreement. Its just different ways of doing the same thing. Also, each of you LLC's would have its own bank account giving you one more separation between your own accounts and the investment.
I hope this helps get you started. Good luck.
7 Replies
- 4yJulio GonzalezPro MemberSpecialist · West Palm Beach, FL · Member since 2008 · 4k+ posts · 1k+ votes
Welcome to BiggerPockets, Xavier! You found the right place for information.
- Real Estate Broker · Forney, TX · Member since 2019 · 1k+ posts · 399 votes4y
@Xavier Karikitan, welcome to the community of BP!
- Morris County, NJ · Member since 2020 · 5k+ posts · 2k+ votes4y
https://www.biggerpockets.com/...
Let me get you started with the post above. That should give you a good primer on LLC's. In your case, you have the best/main reason to form a LLC as you are investing with non-spousal partners.
In your case, its necessary since you need, or should have, to have "all" your options/contigencies figured out in advance. Usually, a lawyer can help you with that when drafting your Operating Agreement. This avoids messy arguments and complications down the road. Also, LLC entity will also be able to formally apportion your tax liability. For example, are you guys doing a 4 way split? Some other split? Will it be variable?
These are the main issues. Otherwise, investing with a legal entity does not provide any additional tax benefits. for "regular" residential investments, the maintaining the limited liability aspects can actually confound and/or make it prohibitively expensive for a single investor to do. For example, legal entities such as a LLC are not eligible for conforming residential loans. You have to use commercial financing.
All this being said, it does depend slightly on what sort of investing you are looking at doing. You might want to try one deal with out it to see how you guys like it, will it work out, etc. Or, form a LLC but don't go crazy (don't spend too much setting it up) to find that you guys won't stick with it.
Again, its depends on what you are doing. You might find that a nested set of LLC's is to your advantage or liking. For example, each of you creates their own single member LLC. Then, you form a a multi-member LLC using your single member LLC's as the owner. Allows for each of you to maintain your own branding/marketing since you have a static LLC. The multi-member LLC could be formed for each deal. This can be advantageous as maybe for a deal only 3 of you want or are ready to go in on it. Maybe you want a different split or a different set of business conditions. This can all be taken care of cleanly in your Operating Agreement. Sure, it can be done with a "regular" LLC formerly described, but you'd have to update/amend your Operating Agreement. Its just different ways of doing the same thing. Also, each of you LLC's would have its own bank account giving you one more separation between your own accounts and the investment.
I hope this helps get you started. Good luck.
- 4yShane SiedermanPro MemberInvestor · Charleston, SC · Member since 2015 · 39 posts · 17 votes
Guys from a tax standpoint much cleaner operating accounts and have all capital contribution into the LLC. If someone sues or gets hurt protects all of you too, it wise for you to google pros and cons on LLC, ref inside real estate. Bottom line knowledge is power read read read, trust no one but ourselves.... Plenty of books and websites explain this **** and usually pretty accurately yoo...
- 4yBasit SiddiqiBusiness MemberAccountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
@Xavier Karikitan
Partnering up with others just because they are your friends is not the best reason to partner with others.
There are normally 3 traits required to make a real estate fund successful - Time, Capital, Experience.
What trait do you have and what traits to your friends have?
If you do decide to go with working with each other.
There are two ways for multiple people to own property - Tenants in Common(TIC) or through an entity(Corp, LP, LLC, etc)
Best of luck!
Basit Siddiqi CPA4.979 Reviews - New to Real Estate · San Bernardino, CA · Member since 2021 · 4 posts · 3 votes4y
You guys are awesome. Definitely gave us some good points to consider. Looks like a legal entity is on our TO DO list. Time to hit the books and see which type of entity would benefit us more at this stage.
- Morris County, NJ · Member since 2020 · 5k+ posts · 2k+ votes4y
As far as legal entities, it's just a LLC really… it's pretty much usually not/never advisable to hold real estate in C Corp long term.. S Corp is really a tax election by a C corps or LLC (it's not a legal entity) but it's Corp-like components still usually not a good idea to hold real estate long term…. A partnership doesn't give you the limited liability
don't forget that as residents in CA, the state will charge/tax your some $750 annually per entity you have pretty much no matter which state the entity resides. It's part of your cost of doing business. That's mentioned many times here in bp. So, having "LLC structures" may not be advisable for a CA residents.
Good luck
Join the conversationCreate a free account to reply, vote on answers and follow this thread.