Forming an LLC in CT - Worth it?

16 Replies

Hello all! 

I have been back and forth on the idea of setting up an LLC for 2 rental properties (each 3 units) I currently own. I live in one of the units with my family.

I've been doing some research on pros and cons of setting up an LLC and I'm seeing the cons > pros at least here in CT... I would love to hear some advice from locals if I have any info wrong

The cons I am hearing;

1) Cost - Creating this on my own through legalzoon I'm seeing a minimum startup cost of $525. CT (245$ Annually cost) 

2) Lending to a LLC - I read a source that mentioned banks would not lend out to a property that is in an LLC - for example; I took a 2nd mortgage on my 1st property in order to have a down payment on the next property. Would I really be unable to do this again if my properties are in a LLC?

3) Taxes costs - Costs extra to do taxes

Pros; 

1) Protection of Assets - I have an umbrella policy on my 2 properties.. would this defeat this benefit? I understand the umbrella is under my name and the LLC would be separated from my name if anything ever happened but what are the chances of a lawsuit exceeding my umbrella

3) Tax advantages - Would love to hear how this is helped others locally

So my real question here to others in CT... have the pros outweighed the cons and how much at the end of the year have you really put up roughly out of pocket to run an LLC? 

Thanks in advance for the feedback!

I just filed the quit claim to move one of my rentals from my name to an LLC this morning. Clearly I see some benefit in doing so.

 An umbrella policy or large liability policies will not protect your assets in the case of a discrimination or other such suit, only liability claims.   The only thing you can do to insulate your portfolio is to compartmentalize by property into individual LLCs, in my opinion.  

 I have been the defendant in an unsubstantiated/bogus discrimination claim. If you Google this in Connecticut, the payouts are huge! It scared the crap out of me and I won’t leave my other properties at risk again.  

Assuming you're talking about a single member LLC, there are no tax benefits or costs different then you're doing it now. A single-member LLC will still appear on the schedule E on your personal tax return, as before.

Originally posted by @Cathie Kovacs :

I just filed the quit claim to move one of my rentals from my name to an LLC this morning. Clearly I see some benefit in doing so.

 An umbrella policy or large liability policies will not protect your assets in the case of a discrimination or other such suit, only liability claims.   The only thing you can do to insulate your portfolio is to compartmentalize by property into individual LLCs, in my opinion.  

 I have been the defendant in an unsubstantiated/bogus discrimination claim. If you Google this in Connecticut, the payouts are huge! It scared the crap out of me and I won’t leave my other properties at risk again.  

Assuming you're talking about a single member LLC, there are no tax benefits or costs different then you're doing it now. A single-member LLC will still appear on the schedule E on your personal tax return, as before.

Oh wow! Sounds like a nightmare I haven't even considered.. does a LLC cover this? Sounds like you didn't have yours setup when the suit originally came through

You don’t need legal zoom to file the LLC. Walk into the Secretary of State building and go to the second floor.

A nice lady will take the form you’ve already completed from the states website and stamp it.

You’ll pay her $70 and you’ll walk out with your articles of formation.

It’s ridiculously easy.

Originally posted by @Michael Lebeau :

Oh wow! Sounds like a nightmare I haven't even considered.. does a LLC cover this? Sounds like you didn't have yours setup when the suit originally came through

Correct. Didn't have the LLC so nearly wet myself when my attorney said they could force the sale of both of my houses to satisfy the judgement. Thankfully it didn't go that far.

An LLC will limit something like this to just the assets of just the one LLC, IF you practice proper separation between you and your LLC (no comingling funds, proper execution of documents etc.).

Originally posted by @Kevin Dureiko :

You don't need legal zoom to file the LLC. Walk into the Secretary of State building and go to the second floor.

A nice lady will take the form you’ve already completed from the states website and stamp it.

You’ll pay her $70 and you’ll walk out with your articles of formation.

It’s ridiculously easy.

 I set it up online from CT SoS website for $120 and got the approval letter back in 3 hrs! - That was easy! 

70$? Is their a next step I'm missing? I know I have to now go through the IRS to get a tax ID number but didn't think that cost anything. 

We created one for about $200, which included the $120 filing/ document fee from the state, using the real estate attorney that did our closing. Most attorney consultations are free. It's worth calling and asking what they would charge if you didn't want to do it on your own. Well worth the protection an LLC will offer.

Update: Went ahead and set up the LLC on my own... forget legal zoom or any other similar sites! Really easy to DIY. I went to CT gov website and filed it, 3 hrs later and 120$ later I got the "Welcome" letter by email. Filed the EIN through the IRS website.. easy!

I did however talk to my attorney and have him switch the deed over to the LLC (Did not want to take the chance of screwing this up) - 150$ for his time and paperwork and 60$ from the clerks office.. so all in 330$ and maybe a few hours of exploring how to set this up on my own!

On top of it I opened my first "business" checking account and will be seeing some money back from that since signing up as a new customer! :)

First creating an llc is easy. You can do it yourself in a day or two online for a small fee. However the protection you will get from your llc will vary depend on the quality of your operating agreement. The ones provided by registrar services like legal zoom or other are ridiculously light and will be defeated easily in court. I would suggest that you get in touch with a real estate/asset protection attorney to draft one for you that you could reuse for all new llc after that. As a cheaper way you may use some of the templates sold by asset protection firms.

Second, when you transfer your property to the llc please don’t use a quit claim deed. You may loose your title insurance. Use a warranty deed instead.

Michael thanks for posting this question I was wondering this same thing as well. I think I may look into having an attorney drafting up my first application as well. Does that mean the name of the LLC is on the lease and do the tenants make payments to this entity directly?

Quit claim deed vs. warranty deed.....interesting I will look into that as well.

I was wondering if anyone that now has a LLC has any issues getting loans?

@Michael Lebeau Here is another consideration for you, loan cost. When borrowing as an LLC interest rates are typically higher than they are for individuals. Whenever anyone asks me this question my answer is always why? What are your goals for the LLC? Would increasing your insurance coverage provide enough liability protection? Based on the answers to those questions you may know which way to proceed.

regarding the warranty deed:

https://www.youtube.com/watch?v=srTDquLh4e8

For the lease, if you want to use the LLC owning the property directly, then yes, it would be named on the lease. You won't own the property anymore, then you should not receive anything in your name as you would pierce the veil of your company and lose its liability protection shield. Be careful of the way the money flows. Why should you receive money from something that has nothing related to you? You are only a beneficiary of the LLC. Then you can only receive money from the LLC. The LLC owns the property. Then rents should go to the LLC. Keep separate bank accounts and do not skip a step.

The setup I am using with my rental real estate is a little bit more complex and is more geared towards FL issue with single member LLC weaknesses:

All my rental properties are held in their own FL LLC (through land trusts also, but for other reasons), all these LLCs are owned by a WY holding LLC.

I also have a FL C corp that is my operating entity. This C corp has a contract with each LLC as the property manager.


The FL landlord/tenant act specifies that the lease agreement should have the name of the landlord. The definition of the landlord is owner or lessor. So I can put my C Corp on the lease. My C Corp collect the rents, pays for all the repairs, bill, taxes, takes a management fee and pays the rest to the LLC.


My C corp is used to write off most of the expenses and also to give me fringe benefits like health care and to contribute to retirement plans. It may also help separating the liability between operation/ownership, but it is probable that everyone will be named in a lawsuit anyway. It adds to the complexity and requires another tax return and filing fee, but I believe that the cost benefit is worth it. It would probably be overkill for only one property, but if your portfolio starts growing it may be an option to consider.

You will find many contradicting opinions in this forum regarding the use of LLC. If you are disorganized, have trouble keeping proper records or don't want to deal with the complexity, then an LLC is not for you and using umbrella policy is a must for you.

In my case, I believe that I am borderline OCD and I love the intricate minutiae of having a very organized structure. I am also a DIY person and I had fun studying and researching all these areas. I drafted my structure, got some legal and tax advice feedback from attorney and CPA and set it up mostly myself. I spent some money on lawyers, books, training. Knowing what I know now, I could have probably saved some money in the process by avoiding some of my early mistakes, but the learning was welcome too. Regarding the yearly maintenance cost, it is not negligible, but I take it as another kind of assurance that make me sleep better.

Even with having this asset protection structure in place, I do have an umbrella insurance to protect myself from outside liability. I don't understand why some people are believing that you should have an umbrella policy or an LLC. They are two different tools that have two different goals. They can both protect you, but not in the same way nor from the same kind of threats. Your cost/risk assessment can make you choose one or the other, none or both. But it is always coming down to what you are willing to risk and leave unprotected.

Originally posted by @Michael Lebeau :

Update: Went ahead and set up the LLC on my own... forget legal zoom or any other similar sites! Really easy to DIY. I went to CT gov website and filed it, 3 hrs later and 120$ later I got the "Welcome" letter by email. Filed the EIN through the IRS website.. easy!

I did however talk to my attorney and have him switch the deed over to the LLC (Did not want to take the chance of screwing this up) - 150$ for his time and paperwork and 60$ from the clerks office.. so all in 330$ and maybe a few hours of exploring how to set this up on my own!

On top of it I opened my first "business" checking account and will be seeing some money back from that since signing up as a new customer! :)

Hey @Michael Lebeau did you register the llc with CT Dept of Revenue Services. I was told that we have to but I can't seem to find any information on what we need to fill out. We set up an LLC and the tenant is paying the LLC. Thanks for any help/information.

 

@Michael Lebeau

Just my opinion.. but I think this topic overall is too insignificant to waste too much time hesitating on. There are endless examples of investors who have been successful and or been sued with or without an LLC.


I would consult whoever your real estate attorney is, and follow their advice. But in general, I'm on board with figuring it out through action. Find properties, create great deals, figure out how you want to run your investments through trial and error. I realize the risk is the potential to get sued when you could have figured it out ahead of time and been protected, but I personally chalk that up to one of the risks of investing.. and move forward. It still doesn't compare to the risk of waiting, and not investing for me.