How/when to start an LLC and business checking account/business credit card.
Hey yall, beginner investor here with 2 properties rented out and producing income. I am planning on buying something bigger this year... or maybe a couple of different properties. Im thinking I should really open an LLC at this point.
1. How/where do you go to open an LLC? How much does it cost and can I do it online safely?
2. I'm guessing it would be smart to split my personal finances and my real estate finances at this point. Is there any advice yall have to open a business checking account?
3. Do you guys get separate credit cards for your business? What card would you recommend?
I just want to make sure I'm not overthinking something and/or missing something, thank you everybody!
Nice discussion sir I am following this thread as I have contemplated the same.
There have been plenty of similar discussions on this forum and you should spend some time reading most of them.
You will find two camps:
1/ LLCs are not needed, you just need liability insurance
2/ LLCs are a must as insurance does not cover you for everything and all your assets are at risk
1/ and 2/ are valid answers depending on your specific situation. No one can tell you what you need, it should be based on your own specifics and your risk taking tolerance.
For me, I strongly support 2/. However, setting up LLC is not as straightforward as going online and creating one. There are a lot of things you need to learn first. I would strongly suggest you spend the time watching the many videos on Clint Coons Youtube Channel that is a treasure trove of information.
You will learn there what kind of LLC you may use in your situation (single member/multi member; member managed/manager managed). You will also have to decide on its taxation status (C or S corp, Partnership or disregarded). And most important you will need a strong operating agreement for your needs (don't use the free template available online or provided by LLC mills). You will also learn in which state or states you need to create your LLC. The most common setup today is to have a WY LLC as holding (either as disregarded or partnership with a C-Corp as manager), and multiple single member disregarded LLC in each state where your properties reside. But there are some variations with specific states where other tools need to be used in the mix like Wyoming Statutory Trusts and land trusts.
After you educate yourself on the structure, you will have to learn how to use it and properly set up its books and bank accounts. Again depending on the structure you chose, it may be different.
If you want to grow your portfolio, don't set up a structure for what you have today, but design it for where you want to be in ten years. If your setup was created properly initially, it will be easy to expand. On the other hand, limiting your views now will become a costly adventure to expand it properly in the future.
@Zach Fulton, welcome to BP. I really like the post of @Mike S., it contains a lot of common sense. I prefer to use an LLC, but I do have 3 properties in my personal name for reasons too long to tell here. LLCs do help protect from liability, but are not magic. Operating them wrong or doing certain actions yourself can limit there protection. One thing to consider is the additional cost and time involved. With 2 properties already it is time to think about going the LLC route. I find I pay about 1% more in loan rates for an LLC and still have to personally guaranty the loans anyway. I also have a couple of S Corps in addition to my LLC and the few I own myself. In hindsight I wished I had just gone with straight LLCs, but I was a different person 35 years ago when I started investing. LLs can get a free stepped up basis for your heirs if you do it right, but it is likely I will not be able to pass on the stepped up basis to my heirs from my Sub S corporations.
Either way good luck, you are thinking the right things.
Quote from @Mike S.:
There have been plenty of similar discussions on this forum and you should spend some time reading most of them.
You will find two camps:
1/ LLCs are not needed, you just need liability insurance
2/ LLCs are a must as insurance does not cover you for everything and all your assets are at risk
1/ and 2/ are valid answers depending on your specific situation. No one can tell you what you need, it should be based on your own specifics and your risk taking tolerance.
For me, I strongly support 2/. However, setting up LLC is not as straightforward as going online and creating one. There are a lot of things you need to learn first. I would strongly suggest you spend the time watching the many videos on Clint Coons Youtube Channel that is a treasure trove of information.
You will learn there what kind of LLC you may use in your situation (single member/multi member; member managed/manager managed). You will also have to decide on its taxation status (C or S corp, Partnership or disregarded). And most important you will need a strong operating agreement for your needs (don't use the free template available online or provided by LLC mills). You will also learn in which state or states you need to create your LLC. The most common setup today is to have a WY LLC as holding (either as disregarded or partnership with a C-Corp as manager), and multiple single member disregarded LLC in each state where your properties reside. But there are some variations with specific states where other tools need to be used in the mix like Wyoming Statutory Trusts and land trusts.
After you educate yourself on the structure, you will have to learn how to use it and properly set up its books and bank accounts. Again depending on the structure you chose, it may be different.
If you want to grow your portfolio, don't set up a structure for what you have today, but design it for where you want to be in ten years. If your setup was created properly initially, it will be easy to expand. On the other hand, limiting your views now will become a costly adventure to expand it properly in the future.
Hey Mike, this is super helpful, thanks a lot for the advice!
Quote from @Jerry W.:I need to research more on different kinds of LLCs. I didn't know there were that many different types. If you wished you could have gone with a different type of LLC, couldn't you just make a new one and move the properties under there?
@Zach Fulton, welcome to BP. I really like the post of @Mike S., it contains a lot of common sense. I prefer to use an LLC, but I do have 3 properties in my personal name for reasons too long to tell here. LLCs do help protect from liability, but are not magic. Operating them wrong or doing certain actions yourself can limit there protection. One thing to consider is the additional cost and time involved. With 2 properties already it is time to think about going the LLC route. I find I pay about 1% more in loan rates for an LLC and still have to personally guaranty the loans anyway. I also have a couple of S Corps in addition to my LLC and the few I own myself. In hindsight I wished I had just gone with straight LLCs, but I was a different person 35 years ago when I started investing. LLs can get a free stepped up basis for your heirs if you do it right, but it is likely I will not be able to pass on the stepped up basis to my heirs from my Sub S corporations.
Either way good luck, you are thinking the right things.
Thanks for the feedback, it is much appreciated!
Just to add on, its a matter of comfort level. We've had many posts where people own 10's of properties under their own name... I think some of it has to do with where/what they are investing, some has to do with personal / pschyological comfort level, and some have personal / family issues. Also, it matters if you are investing with someone else. Lastly, I think people get "scared / sold" into needing an LLC.
One of the major issues is legal entities are NOT eligible for conforming residential loans. Typically, that has meant having to use more expensive commercial lending. As of late, that has not been as much of an issue, I think. The usually "advised" method of moving the Title back into your name for the conforming loan, then back to the LLC after the loan is issued is in my layman's opinion a pretty bad idea. It just adds to not using the LLC properly. Co-mingling and alter-ego are two major issues to piercing your corporate veil. In this "frankenstein" case, YOU should be paying the mortgage since its under your name, not the LLC. Meanwhile, you are liable for the mortgage, not the LLC...
Yeah, there is some stuff to research on LLC's, but its not quite as complicated as mentioned --- but good to have been mentioned. The number of Members (i.e. the "owners") will dictate the taxation status. From there, you can elect to be taxed as a S Corp or C Corp. Neither is recommended to hold Title to real property. The member-managed or manager-managed is a structural issue to be laid out in your Operating Agreement that should be prepared by an attorney, not just some document on line. Lets face it, you really going to to cheap out on what I think is a a few thousand 'ish for what should be $100k's (and that should be equity, not property value)?
At least in NJ (I THINK some other states as well), a single member LLC doesn't need an Operating Agreement, necessarily. What is there to agree with? Its just you... as mutlipel attorney's have told me. Of course, a lender / title company will need one, and thats possibly the only situation to just download a generic doc.
Good luck.
I agree with the previous comments about LLC. Personally, I would recommend a professional as opposed to doing it online. Also, I like the Chase Business Ink or the Unlimited. Ink currently has about 100k bonus points when you spend $8K in the first three months. I also read on BP that the Chase doesn't appear on your personal credit report, as others do.
Hope this helps.