How fast can you setup an LLC?
Mansfield, TX · Member since 2013 · 207 posts · 26 votes
I have been wholesaling up until now using my name on the purchase and sale contracts. But I have been closing them regularly enough that I think its time to consider setting up an LLC.
Typically how long does it take to do this? Thanks
Sure that is the speedy way to go, but do you really think that's the most appropriate for someone who is not a practicing lawyer and/or CPA?
Always seek professional advice - every situation is different, best to sit down in front of your lawyer and accountant. Besides, as you get further along in investing you will need these professionals.
Give it more like two weeks to be realistic.
So here's a quick question for everyone. Besides the protection the LLC can offer @Bill Mitchell what other features might the LLC provide him? There are no tax benefits as its flow through, so what about setting up as something that will provide that.
And how much protection does his LLC provide him if he uses it on every property he puts an offer on and acquires? Or does he need a new LLC for every offer or every property? I know I've heard the answer to this before but I'm drawing a blank on this one.
As originally created, there are no tax benefits, as an LLC, by default, is taxed as a partnership (completely pass-through). But, you can elect to have to have your LLC taxed as a different type of corporate entity -- for example, taxed as an S-Corp or a C-Corp.
When you elect to have the LLC taxed as another entity, the IRS doesn't differentiate between LLC and corporation -- it's completely the same from an IRS/tax standpoint.
So, you can have a business entity that is easier to manage (the LLC), but is taxed exactly like an S-Corp or C-Corp, which may have tax benefits for some.
Yes, you better see your accountant and consider double taxation issues with the C corp.
If you're running a cable TV operation, getting your problems solved in Delaware can be done by contract as your home office, in RE, much of the cases will be kicked back to the jurisdiction where the property is located, state law dictates, won't do you much good.
Holding in your pharts is a bad thing, they travel up your spine and with a little knowledge they cause you to have really crappy ideas! :)
Well here is what a TX attorney said he does on Ali threads. Looks interesting, cuts registration fees of having separate LLC's. My state is $160 then $100 for each series, and has the same legal structure. I asked if had ever been in court with such a structure and got no answer. My agent says they are hard to insure, but I want to get some quotes. In Delaware, or better yet Nevada, a series could be a C or S corp for tax benefits. I read over half of the fortune 500 companies are registered in these states. I'm sure if you know what you are doing, LLCs have better tax and legal breaks there. Might be time to take a flight to Vegas to find that attorney, or loose some cashola gambling lol!
A typical series LLC structure for many of my real estate investor clients looks like this (I’ll use my last name in the example):
Master LLC = Clark Holdings, LLC, a Texas series limited liability company.
First series = Clark Property Management, LLC, an individual series of Clark Holdings, LLC, a Texas series limited liability company.
Second series = 123 Main Street, LLC, an individual series of Clark Holdings, LLC, a Texas series limited liability company.
Third series = 456 Main Street, LLC, an individual series of Clark Holdings, LLC, a Texas series limited liability company.
I run my property management through the first series. The second and third series each hold their respective property and the respective debt.
If, subsequently to setting up my series LLC, I buy another property, I simply add a fourth series (i.e., 789 Main Street, LLC, an individual series of Clark Holdings, LLC, a Texas limited liability company). If I subsequently sell the asset in the first series, I then can dissolve that individual series.
I hope this gives you and your readers some valuable insight in to the structure of a series LLC.
What about accounting methods, is cash better than accrual if you tend to close your contract sales, income and expenses all in calender year?
What about accounting methods, is cash better than accrual if you tend to close your contract sales, income and expenses all in the same calender year?
I'm not a tax professional, but it would seem to me that in the world of real estate investing, cash and accrual accounting would generate the same financial statements under most situations. Generally, expenses are paid when incurred (buying a property, paying a contractor for work completed, etc) and revenue is recognized immediately upon sale (for example, closing on the sale of a property).
Btw, cash basis accounting is generally easier than accrual based (especially for those of us who aren't the CFO types), and cash accounting makes it much easier to manage cash flow, for obvious reasons.
Cash is the best option for the average person. Accrual can complicate things for the average investor.
Double taxation, may or may not be a big issue for some people. Especially true with married couples or those who are not planning to take out the funds anytime soon. I will advise that it is typically an extremely bad idea to hold real estate in a C-corporation long term.
Terry, you've been holding them in again, ....Accrual, you going with LIFO or FIFO?
Use the cash basis method :)
Bill,
What is LIFO or FIFO? I need to add these to my list of BP acronyms I been struggling to figure out since I joined. :)
We run into the issue often where we have a lot of money out in investments that we have not been paid for making it hard to determine where you’re at. The accrual method is more accurate from a income/dept standpoint from what I understand, but can be misleading since income ledger may show thousands of dollars in sales, while in reality your bank account is empty because your customers haven't paid you yet.
Cash method provides a more accurate picture of how much actual cash your business has, it may offer a misleading picture of longer-term profitability. For instance, your books may show one month to be spectacularly profitable, when actually sales have been slow and, by coincidence, a lot of credit customers paid their bills in that month.
Reason I bring this up is you'll probably be asked to choose a method when you register your LLC and in order to change it you have to write the IRS and wait for approval. I can change my tax year by writing the IRS.
Other thing is bank accounts: The banks will want your Articles of Organization and Operating Agreement. The OA also acts as the Pay on Death (POD). If you are single member LLC I believe you can set up a POD, not multimember.
Steve,
"I will advise that it is typically an extremely bad idea to hold real estate in a C-corporation long term"
Why?
What is LIFO or FIFO? I need to add these to my list of BP acronyms I been struggling to figure out since I joined. :)
"Last In, First Out" and "First In, First Out"...
With accrual accounting, you need to match actual received cash with a recorded revenue transaction...do you match the cash transaction with the most recent or the least recent revenue entry?
Well, I follow some of the series stuff. I would suggest for those who are lost and completely clueless pick up either "Incorporate and Grow Rich" or "Loopholes of the Rich." They are rather big books filled with long pages of rather boring information - but obviously very helpful. I recall the series stuff and that it can be a very lucrative way to go about protecting your asset. And either book will also have plenty on tax advantages you can get for your self depending on the entities set up.
An inventory accounting method that assigns cost that goes to units produced or sold as J. Scott mentioned. Raw goods are produced to widgets (widget=any product) through a manufacturing process and as materials are purchased over time there will be price differences, in inflationary time FIFO will be best, when times are flat or recessionary LIFO is better as it places timing of purchases to sales.
It was a joke! Breaking RE materials down for 2 or 3 houses like roofing nails or sheet rock would be silly, even 20 houses a year, maybe at 200 or at 2,000 units there might be a difference.
The more you try to learn on your own in finance and accounting the greater the chance that you'll mess up, you don't need to go past Accounting 101 and 102, bookkeeping and preparation of a budget, income statement and balance sheet, from there that's all you'll really need for what you'll be doing, IMO. From there, if you need anything more, see a CPA or degreed accountant. :)
With LLCs being as new as they are I doubt you find much practical info on them in get rich text books. Don't feel along in not understanding them, many statues are still being interpreted by case law and I bet you be hard pressed to find a LLC with Real Estate structure, more so a Series LLC as denoted on this thread that has been in a court of law. Everything else is just opinion, including attorney's. I'd suggest continuing to learn all you can by reading statues in your state and watching case law. It really is not rocket science, go read your states LLCs statues that will give you the ability to at least know what questions to ask an attorney that has actual experience in court with what they propose as legal.
"Last In, First Out" and "First In, First Out"...
With accrual accounting, you need to match actual received cash with a recorded revenue transaction...do you match the cash transaction with the most recent or the least recent revenue entry?
We manage around 25 open accounts, residential and commercial, a day and I’d guess at the end of the year we will have closed around 1500 revolving accounts. We hope to double that next year.
Tracking material and labor cost per day per job is a challenge, especially when a lot of your own money is out there and you have not been paid. Right now our production managers bring receipts to our admin with job #s and we assign and track cost that way to a home, etc….
Some accounts we get paid in a matter of days, larger jobs weeks. I wish there were a way to swipe a card and assign a job# to it so our admin could go online, see the cost, and not have to wait for paper receipts. Other problems with paper receipts is it can be difficult to return materials when the production manager turned them in, and/or could lose them. We do reconcile our accounts to bank statements too.
So I been talking to banks about setting up separate debit cards for my PMs, I would be able to filter one of them out online, but would not be able to tell what job # the charge is for. Our PMs can purchase materials for 5-10-15 jobs per day.
I know we may be getting a little off topic here, but it is something to consider as part of the time setting up an LLC. I'm sure the big companies have enough equity built to buy them time to balance their books, but it can be a challenge if you are start-up without a lot of equity. As you grow the need for equity also increases making it more challenging. Every job we do we put a percentage in the LLC as an equity asset, some goes to feeding new business, some to growing.
The more you try to learn on your own in finance and accounting the greater the chance that you'll mess up, you don't need to go past Accounting 101 and 102, bookkeeping and preparation of a budget, income statement and balance sheet, from there that's all you'll really need for what you'll be doing, IMO. From there, if you need anything more, see a CPA or degreed accountant. :)
Agreed. Pick up a good financial accounting textbook and a QuickBooks guide, and between them, they will provide all the info you need.
By the way, here's the textbook I've had (and referred to many times) since business school:
Financial Accounting
@Terry Portier - As far as tracking costs more easily b/w origination and admin input into your system - most people have smartphones these days. Make them take a picture of it and e-mail it to your admin with the job site # on them. If you use Gmail you can run quick searches to find invoices/reciepts. If you use QuickBooks you can "attach" the image to the transaction and lock it in to be reviewed when your balancing your books. I'm a big fan of a paperless office! There are also a few apps out there that have the process I described above down to a couple pushes of the button for those of you less tech savvy business owners. I think the one we used for a while is called expensify.
As far as Delaware LLCs go; Businesses choose Delaware because it's the "birthplace" of the LLC and every other state "adopted" Delaware's lead officially or unofficially. If you set-up in DE and do business outside of it you still have to register as a "foreign" business in the state you operate and are thus subject to that state's laws and statutes. Like Bill mentioned earlier, you'll still be bounced back to the appropriate jurisdiction if you have to go to court so there is no realistic benefit for us small fish.
And I concur! Accounting 101 & 102 is about all you need to get things lined out for your tax preparer. You guys crack me up with the all this LIFO FIFO stuff :)
First of all, the capital gain rates, second, BIG tax, Personal holding company, which is an additional tax on all undistributed earnings from passive sources(Greater than 60% passive income).
This thread has been filled with a wealth of information, stuff I haven't even dealt with but it is certainly something to keep in mind in this business. I just recently took an Accounting course as part of my degree curriculum; at this point in time I probably forgot about all that information but I did keep the book just in case I would use it in the future (like now).
With regards to the LLC deal, taught me a couple of things about this entity when dealing with wholesaling. I happen to live in Delaware and yes, all sorts of businesses happen to use the flexibility that the laws provide there. I'm still new at this but this thread is one of those to keep as a reference when that time to set up any of the previously discussed entities comes up.
I have set up an LLC myself as well as an S-Corporation and I can honestly say that I didn't know how to properly utilize either entity. Unless you've got a solid background in corporate and tax law, take some time to get legal advice and be sure that you're making the right choice for your business and life plans.
I'd recommend contacting an Enrolled Agent and an attorney that specialize in entity structure and tax planning.