All Forum Posts by: Keith Barton

For a single member LLC disregarded entity - you can take out however much money you want, whenever you want for whatever reason you want (although I would recommend you not leave the company underfunded.) All you need to do is accurately record the withdrawal in your accounting system and classify it as a draw on owner's equity and you are good to go.

In addition, as it is a disregarded entity - you can put money in and take it out all day long (as long as you record it properly) and it has no affect on taxable income. For example, say you have a checking account for the business and it has a debit card that doubles as a credit card. Now let's say you have to pay for a parking meter for business use. Obviousely you can't write a check of use the debit/credit card to pay the parking meter. Therefore, you have a "petty cash" account (your pocket), you pull change out of your pocket and feed the meter. Now, when recording the transaction for the books you deposit cash into "petty cash" and the deposit is classified as coming from an "investment in owner's equity", then you pay out of the "petty cash" account to "cash", which is then assigned to the expense account "parking" (or whatever expense account name you use). Money is invested in the company (which money is not classified as taxable income) and money is paid out for a business expense, which money: 1) is counted against revenue when determining income; and, 2) is deductible for tax purposes....

Hang on here - if we assume a default or common set of circumstances then the advice to take a draw is fine. HOWEVER, other circumstances could make taking a draw DISASTEROUS.

How many members are there in the LLC? Is the LLC taxed as a partnership or as a corporation? What is your position with the LLC?

For example, if you are the only member of the LLC and the LLC is taxed as a disregarded entity (which is the default method unless you elect to have the LLC taxed as a corporation) then the ONLY way you can pay yourself in accounting terms is to take a draw on owner's equity.

However, if you are a member and the LLC has elected to be taxed as a corporation, you can choose to pay yourself a salary or you can take a distribution. Paying yourself a salary means the LLC has to withhold payroll taxes and you have to pay income tax on the salary, but the LLC also gets to take that as a business expense deduction. If you take the money as a distribution, the LLC will pay taxes on that, and you will pay capital gains taxes on that at your normal tax bracket rate. In addition, if you are not the only member, is that distribution in compliance with your operating agreement or member agreement? If not, you can run into big trouble.

While there is a higher probability that Jeff is talking about a single member LLC that is a disregarded entity - that is just an assumption until more information is known. You know what they say about assume....

By the way - if we are talking about a single member LLC that is a disregarded entity - you can take out however much you want whenever you want. The accountant classifies it as a draw on owner's equity and you report it on IRS Form 1040 Schedule C.

Too many variables, somewhat unique situation, and not enough information to give a reasonable answer on a forum. Best advice is to contact a professional knowledgable in what you hope to accomplish. You are prepared to invest in a complex (so presumably many units and much money) pay a little more and you will MORE than recoup your investment in paying a professional by saving the trouble and/or money of using the wrong setup....

When evaluating how much to own in any given business entity, it is better to consider equity than number of properties or even market value of properties. Assume you have a $1 million property in an LLC, but there is only $20k in equity. If someone gets a judgment and is able to force a sale of the property to satisfy the judgement - what are you losing? Assuming the mortgage is satisfied (a big assumption, but bear with me) - you lose $20k. Now let's say you have two properties owned by an LLC. Both properties are $50k properties. Each property has $10k in equity. Again, someone is able to collect on a judgment by forcing a sale of the property (again assume the mortgage will be satisfied) - what do you lose? $20k. It doesn't matter if there's 1 property or 2. It doesn't matter if the market value is $100k or $1 million. Either way - you lose $20k: your equity.

You have to determine what you are comfortable losing in the worst case scenario. If you have $500k in equity from 10 properties - how much are you willing to lose at any 1 time? If you can stomach losing $250k then you should have 2 LLCs. If you don't want to lose more than $100k you should have 5 LLCs. If you can't stand the thought of losing more than $50k, you should have 10 LLCs.

As to how much protection an LLC can offer - there is too much to discuss in 1 post. Let's just say it can vary between states, but more importantly is what caused the liability. For example, if someone inside the LLC did something to cause liability then the assets of that LLC can be kissed goodbye. If you as an individual have judgment creditors coming after you that have nothing to do with that LLC or any property it owns, then a charging order (and the bylaws, member agreement, operating agreement, etc... are setup properly) should protect the LLC against being used to satisfy your debt.

Also as far as the LLC being responsible for something - a good way to reduce this risk is to have a separate business entity that manages all of your rental properties - the management company owns no property, manages rentals, and is responsible for maintenance and there is a great contract between the management entity and all of the ownership entities. What is most likely to cause liability? Improper management of the property or a bad interaction between a tenant and the property manager. Guess what - judgment against the property company? No problem - you don't lose the property, the management company shuts down and you form a new one (again, assuming the structure is setup properly)

Best thing to do is contact a local professional who can guide you according to your circumstances and your goals....

As far as maxing out on financing - if you do it correctly you can get great tax savings, you are a less attractive target for lawsuits, you can make more money, and you don't have to take the credit hit personally - but this takes much more planning and effort....

Brian's suggesting of seeking a professional in your area is really the best answer.

There are too many variables and not enough information to really answer your question. There are so many options with structuring business entities for liability purposes, for tax purposes; and, YOU (if you get your license) may also have to worry about professional service and ethical restrictions, etc....

The best way to accomplish what you are thinking about (and while I say best - this does NOT mean it is actually going to work...) is not through a restrictive indorsement. Restrictive indorsements are the instructions on the back of the check stating things like "for deposit only" and some can be on the front of the check like "payment in full", etc....

However, a check is actually a type of contract. And, since a contract is (more or less) offer, acceptance, and consideration - it is theoretically possible to write contract terms on the check such as writing (above the line on which you write the recipient's name) something like the following: "Acceptance of this check constitutes [owner's] agreement to assign xyz lien to John Doe in exchange for the pruchase price of $X" You could also write that again on the back to make extra sure....

However, you should consult an expert in your local area to determine if this would work with your state's laws....

I can think of 2 possible reasons for an attorney to review: 1) in some states (e.g., VA) a transfer of property must be handled by an attorney - I don't know if that applies for all transfers or only certain types; and, 2) there is such a thing called "title opinion" or "title opinion letter" drafted by an attorney giving a legal opinion on the status of who legally owns the property, whether there are any potential claims on the property etc.... As far as I know, title opinions are not used very frequently anymore for general purposes. They are used more frequently with regards to ascertaining mineral rights. They are also more frequently used by lenders to assess the risk to the lender in issuing a loan secured by the property. Maybe it was recommended you get a title opinion letter since you want to transfer the property from you as an individual to a business entity?

Depending on the terms of the title insurance policy. If the policy was only issued to protect the lender who financed your purchase of the property (assuming this is how you bought it) then you are not covered by the policy - only the lender is while the lender has a mortgage on the property.

This post will be long, but there are a number of issues I want to clarify....

§1 DEED TYPES (there are more than 2 types of deed, but I am only discussing 2....)
A)
Warranty Deed - The grantor of a warranty deed warrants (guarantees) the title to the property is good: nobody else has rights in the property. If a 3rd party claims the 3rd party has a right to the property, which right has an impact on the new buyer's ownership of the property, the grantor agrees to defend the new owner against the claim of the 3rd party.

While all that is technically required is that the grantor makes a guarantee, in practice, that guarantee is in the form of an insurance policy that is purchased. The insurance company agrees to hire an attorney to defend against any 3rd party claims. The insurance company protects its butt (technical legal phrase there) by only issuing a policy if a licensed insurance agent certifies a proper title search was done and the agent determines there are no legally valid claims that can be made against the title. This is more commonly known as a "title search" or "title exam"; and, it is performed by a "title agency".

Warranty Deeds are required by lenders that are given a mortgage to secure repayment of the loan that was used to purchase the property. Many people don't realize that there are 2 types of title insurance policies: 1 only protects the lender - so as soon as the loan is paid off and the mortgage is realesed the owner cannot make a claim on the insurance policy; 1 protects the owner's title so the owner can make a claim on the insurance policy anytime anyone tries to assert interest in the property

Please Note - just like any insurance policy, there are "exclusions" or things the policy will not protect against. When the policy is issued, the exclusions will typically specify that the policy only protects up to a certain dollar value, the policy will not protect against tax liens, any existing right of way, easement, special assessments, etc.... Also, the policy will never protect against any change in the title that takes place after the policy is issued (e.g., the new owner has work done and a contractor places a mechanic's lien on the property, the new owner grants a utility easement, etc....)

B)
Quitclaim Deed - The grantor gives up any and all rights the grantor has to the property and transfers those rights, WHATEVER THOSE RIGHTS ARE, to the new owner. The grantor makes NO GUARANTEE WHATSOEVER about any rights in the property. Quitclaim deeds are most commonly used in a divorce (1 spouse transfers all rights in the property to the spouse who will keep the house), when transfering property to a living trust, transfering property between companies owned by the same person(s), or transfering property from an individual to a company owned by the individual. In these situations, the "old" owner had a warranty deed and the "new" owner has a close enough relationship with the "old" owner that the "new" owner is not worried about anyone asserting a claim since the title insurance was issued on the warranty deed (and in some instances like the living trust, the "new" owner still has the same rights to the guarantee of the warranty deed.)

§ DEED RECORDATION
Each state has its own laws about the requirements of a deed to real property. For example, in Ohio (see R.C. 5301.01):

To be valid, a DEED must be:
i) signed by the grantor;
ii) the grantor must acknowledge the signature before an official (a judge, a clerk of court, a county auditor, a county engineer, a mayor, or a notary public)
iii) the official shall certify the acknowledgement and sign a certificate of acknowledgement

Note - a properly signed (but not recorded) deed is a valid transfer of real property - HOWEVER, without recording, there is little protection against 3rd party claims against the property - (I've seen cases where people sold the same piece of land to different buyers!)

In Ohio at least, it is not required that an attorney create a deed. It is not required that an attorney file a deed. Whether a warranty deed or a quitclaim deed is used does not matter for purposes of legally transferring property. However, do something wrong and you may have unintended and/or negative consequences so I always recommend you consult a local professional to give you guidance....

If you REALLY want to know what you can or cannot do with regards to checks - lookup Article 3 (negotiable instruments) of the Uniform Commercial Code (UCC) as implemented by your state.

The UCC is a recommended model set of laws for governing commercial transactions. Each state has the authority to enact its own legislation governing commercial transactions, which means there can 50 different laws governing a certain type of transaction depending on what state you are in. To facilitate commerce, certain organizations combined efforts to create a set of laws that would represent "ideal" legislation to govern commercial transactions. It is still up to each state as to whether that state enacts the model UCC, or most of the model UCC, changing certain things to satisfy that particular state, etc....

Anyway, Article 3 governs negotiable instruments. Checks are negotiable instruments. §3-104 more specifically will give you more details....