This article does not constitute legal advice. We recommend you seek the counsel of an attorney familiar with your specific situation and market to ensure you make the best decisions within your real estate business.
If you’ve read any of our previous articles, you know that we are big fans of the LLC structure, and especially of its mightier big brother, the series LLC. The thoughts in this article apply to the series LLC—or any LLC structure, for that matter. LLC entities are one of the most essential tools for anyone with aspirations of long-term real estate investing, as well as anyone with a need for asset protection. Spoiler alert: That’s pretty much everybody, or at least everybody with anything to lose. But as humans, our brains are hardwired to go after instant gratification and avoid pain—and most of us know there are many kinds of pain, but we all know the lengths that people will go to to avoid pain in the pocketbook.
That’s why this becomes the first question many of my personal clients (and many more from the investment corners of the internet) ask:
“Wait, I’m just a dude/dudette with a rental property or two. Is setting up an LLC really worth my time and money?”
Whether the goal is to set up the LLC for asset protection or for other business reasons, nobody wants to take the hit without being sure it’s worth it. And as an attorney, I encourage that: Informed clients who ask the right questions are not only easier to deal with personally, but much more likely to be successful in their ventures.
I’m going to be brutally honest here. The upfront cost of an LLC isn’t bargain-basement cheap. But it isn’t bank-breaking, either. Regardless, I can also promise you that not setting up an LLC is more expensive, especially if you think about your finances in the long run.
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Alright, What Kind of Money Are We Talking Here?
Setting up an LLC might cost you around $1,000 depending on how much you want done with it, whether you also will require a property transfer, and other personal factors. I know $1,000 seems like a lot to pay at first. However, an LLC will pay dividends in the long run. And it is absolutely worth the expense to pay a knowledgeable attorney to help you. Ask anyone with expertise on this subject, and they will tell you that when it comes to setting up your LLC, do it right or don’t do it at all.
Do I Need A Shell Corporation/LLC?
The answer is yes. What a shell corporation does is function as an operating company, which in short means it allows you to have a face to the world. It limits your personal liability from all of the business dealings that you do. While you manage the corporation and profit from it, it is a separate legal entity from you as an individual.
This affects your real dollars in two major ways:
- The shell corporation protects you from lawsuits in the first place and from any potential damages, and
- Because a lawsuit against you, even one without merit where the plaintiff can’t collect against your assets, goes against your credit score. The shell corporation’s protection preserves your good credit. Lawsuits will also kick in a lovely concept called lis pendens, which means you would be holding the asset in question until the suit is resolved. Learn more about lis pendens and title clouding from my previous piece on the subject.
This second point is critical: Once you have a low credit score, you won’t be able to obtain the financing necessary to operate your business and acquire property. This prevents you from being able to do deals the way that you want to.
Those are real dollars. If you’re talking about less than $1,000 to protect your credit score, you’re talking about pennies on the future dollars that a bad credit score will cost—not to mention the fact that this structure can really save your assets in court. That’s a hard figure to put a dollar amount on, but consider the actual costs—financial and emotional—of ending up on the losing end of a lawsuit and losing everything you’ve worked for.
Is the Cost of an LLC Worth It?
If you plan on being in the real estate business for the long haul—for years or decades—the cost of an LLC is completely worth it. While the cost of an LLC may seem like a lot up front, at least it’s something you can afford.
The Cost of an LLC Structure vs. the Cost of a Lawsuit
On the other hand, no one can afford a lawsuit. It doesn’t even matter if the lawsuit is total B.S., hogwash, or frivolous as can be. The suit could be from a tenant claiming intentional infliction of emotional distress because they claim the color of your house triggers their PTSD or unreasonably upsets their emotional support hedgehog. Never mind that they toured the place with a blindfold on or that the “trigger” seemed to only occur when they decided they weren’t a fan of paying rent. Does this seem ridiculous? Have a quick Google of “frivolous lawsuits” or “landlord-tenant lawsuits,” and you’ll get the idea that this absurd scenario isn’t really all that crazy. Another cost to consider is the fact that you won’t be able to use that asset during the suit, thanks to a little thing called title clouding.
The reality is simple: One of the perks and downsides of freedom is as Americans, we can sue each other at any time, for any reason. Nobody ever said those reasons have to be good ones. If someone’s money is green and you have stuff they want, some attorney somewhere will take even the most asinine case you can imagine.
The details of a lawsuit are required to be listed in public databases by law, and while most of your business acquaintances aren’t going to bother to read the details of Mr. Hypothetical Crazy Tenant and His Hedgehog, they will see the cash-money damages that Mr. Hypothetical Crazy Tenant is pursuing on behalf of himself and said emotional support hedgehog. All that anyone’s going to really look at, most of the time, is the figure.
So besides severely damaging your credit score and crippling your business, your business reputation would also be jeopardized.
Think about it: Who is going to want to do business with someone who has already been sued before? Would YOU do business with a person or company if you knew they were sued? Think about that. In addition to leading a team of asset protection specialists, I am also a real estate investor personally. I know how it feels to be in your shoes.
And from where me and my colleagues are standing, there’s no doubt about the value of a solid LLC for asset protection. It’s a no-brainer. It’s math even third graders can do: the $1,000 you spend today could save everything you own someday.
What do you think: Is $1,000 worth the peace of mind and safety from potential lawsuits?
Weigh in below!