All Forum Posts by: Chris K.

@Brock Sheets

1. That won't work. Transfer tax gets assessed when you transfer the property. Using an out of state LLC has no impact on that process.

2. Sure. Last time I looked into it, I thought Fannie or Freddie changed the rules so that it allowed the use of LLCs in certain circumstances. But I might be wrong on that. Assuming they don't, you will just need to use a portfolio loan.  

3. I'm not sure what you mean by "abandoning" a LLC. Assuming you mean abandoning the idea of using an LLC, that is also an option. Whether you should use an LLC depends on several factors. It's hard to know what your situation is online. Probably worth talking to that attorney or someone else you can engage to review your situation.

Disclaimer: While I’m an attorney licensed to practice in PA, I’m not your attorney. What I wrote above does not create an attorney/client relationship between us. I wrote the above for informational purposes. Do not rely on it for legal advice. Always consult with your attorney before you rely on the above information.

@Maria Laura Lapoint

You can also try @Marc Winter and his team!

Disclaimer: While I’m an attorney licensed to practice in PA, I’m not your attorney. What I wrote above does not create an attorney/client relationship between us. I wrote the above for informational purposes. Do not rely on it for legal advice. Always consult with your attorney before you rely on the above information.

@Grant R.

50/50 arrangements do not guarantee "equal financial footing." The party with a bigger war chest will have an advantage in that regard. Now it's better than say being 49% member of a 49/51 LLC. But the 50/50 arrangement doesn't really protect you from being rolled over by a better financed member if a conflict were to occur.

It's basically the same concept as to why it's generally a bad idea to fight against the governmental agencies like the IRS or a major bank. It doesn't matter if you have a reasonable claim against them. They are just too big and well funded for you to realistically survive a lawsuit. 

I think the story you are thinking of is Queen --- Smashing Pumpkin's reunion process was less than ideal. But those stories do not really concern the benefit of an equal equity split. Yes, maybe that was one factor to reduce the tension. Yet often the central conflict in those situations goes much deeper than just the money or equity. I would also note that for every story like Queen, you get the other side as well (e.g. Michael Jackson - Jackson Five, Justin Timberlake - NSYNC, Beyoncé - Destiny's Child). 

Disclaimer: While I’m an attorney licensed to practice in PA, I’m not your attorney. What I wrote above does not create an attorney/client relationship between us. I wrote the above for informational purposes. Do not rely on it for legal advice. Always consult with your attorney before you rely on the above information.

@Grant R.

I don't necessarily disagree with the spirit of what you say. But the purpose of an operating agreement is to set the rules for the members of the LLC. It's not an employment contract where the members should hash out their day-to-day responsibilities. The inherent problem with a 50/50 situation is that there is always a potential for a deadlock. If it truly blows up, that's not something you can solve with an operating agreement that defines roles and responsibilities.

Whenever you think about an operating agreement, don't look at your current partner as the member you will deal with. Instead imagine some other person in front of you that you really don't want to do business. It could take on the form a creditor of your current partner. Or perhaps it is the partner's spouse that you actually hate deep in your guts. Does the operating agreement clearly spell out what your rights are in those situations? And more importantly, have you seen the agreement/language get litigated over in court? 

I am not saying you can't form a proper 50/50 LLC. It's just that it is hard and costly. And trying to do a 50/50 LLC on top of having this "working" member and "equity" member split is even worse.

On that note, the fact you successfully completed these deals with a 50/50 LLC doesn't mean the form is good. It just simply means that you did a good job running the business. The true test of any of these arrangements is when things go nuclear. It's what I say about every single agreement --- if everyone involved is making money, it honestly doesn't matter what the agreement says. It's when things go sour where it can get ugly. The purpose of any agreement is to keep things civilized when that time comes.

Disclaimer: While I’m an attorney licensed to practice in PA, I’m not your attorney. What I wrote above does not create an attorney/client relationship between us. I wrote the above for informational purposes. Do not rely on it for legal advice. Always consult with your attorney before you rely on the above information.

@Bryce T Attisani

Aside from what @Dmitriy Fomichenko wrote, note that you have to pay the realty transfer taxes again if you transfer the property from your personal name to the LLC. You also want to make sure you don't violate any due-on-sale clauses.

In terms of where to open your LLCs, I generally form the RE Holding LLC in the state where the property is. So if you investment property is in PA, then I form the LLC in PA. Why that's the case gets complicated but I think it is generally the best option for slew of legal/practical reasons. For what it's worth, I never considered state income tax as being a major factor in forming an LLC.

Disclaimer: While I’m an attorney licensed to practice in PA, I’m not your attorney. What I wrote above does not create an attorney/client relationship between us. I wrote the above for informational purposes. Do not rely on it for legal advice. Always consult with your attorney before you rely on the above information.

@Ryan Potuck

What size multifamily? How extensive is the rehab/renovation?

Disclaimer: While I’m an attorney licensed to practice in PA, I’m not your attorney. What I wrote above does not create an attorney/client relationship between us. I wrote the above for informational purposes. Do not rely on it for legal advice. Always consult with your attorney before you rely on the above information.

@Brian Kantor

A few thoughts on your post:

• On BP, we tend to use the term partnership loosely. But you probably do not want to form a partnership with your partner. Note that you can end up forming partnership with another by accident. That is not great as these general partnerships arguably exposes you to more liability.

• You essentially have a structure where the other person is providing you with money for these projects. Why not just make them a lender? Do they want equity? Why do they think they want equity?

• To the extent that you do end up giving equity, you will have a situation where the capital contribution made by the two of you does not match the membership interest split between the two of you. That is not the end of the world, but it has tax consequences.

• 50-50 LLCs are the worst. As a lawyer, I would rather write a 80-page operating agreement for a convoluted multi-member LLC than a 50-50 LLC. Essentially you created a business structure where deadlock is the likely outcome when things go wrong. It is possible to break the deadlock using various mechanisms. But they are get convoluted and drafting them is not particularly fun.

• All your ideas are reasonable but also requires a lot of follow up questions.

Long story short, you need a lawyer. But if you came to me, I would tell you to see if you can find someone who would just lend the money and forget about equity. If you insist on forming a 50-50 LLC, I will ask if you are ready to spend anywhere from $2500 to $5000 on the formation and an operating agreement. If that amount is too expensive for the project, you may not have a project that is worth the headache that a 50-50 LLC can pose.

Disclaimer: While I’m an attorney licensed to practice in PA, I’m not your attorney. What I wrote above does not create an attorney/client relationship between us. I wrote the above for informational purposes. Do not rely on it for legal advice. Always consult with your attorney before you rely on the above information.

@Annu Zer

I would try @Ronald Rohde. Active poster on BP and very knowledgeable attorney!

Disclaimer: While I’m an attorney licensed to practice in PA, I’m not your attorney. What I wrote above does not create an attorney/client relationship between us. I wrote the above for informational purposes. Do not rely on it for legal advice. Always consult with your attorney before you rely on the above information.

@Nicole Brodie

The question you are asking involves two parts. First, you want to consider the legal structure of an LLC versus Corporation. Second, you want to decide how you want to be taxed.

As a practical matter, LLCs are now the most commonly used corporate entity. With the exception of a few situations, nowadays everyone uses LLCs because they are so convenient and flexible. 

Note that the IRS doesn't have a special tax category for LLCs. Instead, the IRS allows you to decide how you want to be taxed (i.e. sole proprietor/partnership, S-Corp, and C-Corp).

Disclaimer: While I’m an attorney licensed to practice in PA, I’m not your attorney. What I wrote above does not create an attorney/client relationship between us. I wrote the above for informational purposes. Do not rely on it for legal advice. Always consult with your attorney before you rely on the above information.

@Andrew S Selby

Basically what @Charles Carillo. If you are the buyer and the property is listed by a brokerage, note that you can basically have a realtor for free. That gives you access to the PAR forms. I suppose you can just try to take the PAR form and use it. But despite the fact that it's routinely used for transactions, it's not a simple form. 

Disclaimer: While I’m an attorney licensed to practice in PA, I’m not your attorney. What I wrote above does not create an attorney/client relationship between us. I wrote the above for informational purposes. Do not rely on it for legal advice. Always consult with your attorney before you rely on the above information.