LLC?
i'm relatively new to REI, but i've read a couple of books and parused the forums a bit and i've never run across an answer to this...
should i set up an LLC before i make my first investment? or is that unnecesary until i have a crapload of liability? it seems simpler to just set up the company first so that i can get everything under one umbrella.
I have been told on several occasions that you are better off to have the LLC in place. This is especially helpful if you have to finance part of the purchase price. Either way it is pretty simple to put the acquired property into the LLC.
This question is asked alot, and on cue, someone shouts out, "Get a business formed ASAP." Frankly, this is plain out bad advice.
Your best course of action is to go speak with both your accountant and attorney and have them advise you on your particular situation. There answers may surprise you.
My personal take on the subject is why go to the expense and trouble of forming a business entity for a profession that you a)No nothing about yet b)have never worked in and c)don't yet know if you can successful do, or even like doing?
"This is especially helpful if you have to finance part of the purchase price." - Sorry, but trying to get a loan thru a newly established business is like trying to push a watermelon thru the eye of a needle. Don't exactly know how that can be helpful.
Simply forming a business doesn't necessarily protect you from liability. There are alot of rules to follow in order to maintain that protection. Your best protection is to maintain exceptional records/documents regardless of business structure, and operating your business in the professional and ethical manner possible.
At some point, it may be benefical for you to form a business structure other than sole proprietorship, however, I think that starting one before making your first investment is like putting the cart before the horse.
Roger
Not to take anything away from Roger's advice, but I am cheap and lazy. If I have my LLC formed before purchase the title can be placed in the LLC's name right off the bat. If you form the LLC after you have to go through the time and money of transferring the name. Again, be smart about everything. After your due diligence in REI it would be good to have the cart (LLC) before the house (er... horse).
Ron
Yes, you must ask an accountant or an attorney, but the premis is not that you are looking to be unethical nor cook the books. Your looking to either protect assets or reduce taxes.
Being a sole proprietor guarantees that you do not have the protection you deserve. Questions should be asked. Do you have partners in this venture?(whether they are family or not). Do you have other assets that you need to protect outside of R.E? What tax bracket are you in? The list goes on. Get a good advisor that asks all the pertinant questions and good luck.
sweet! awesome advice with a couple of different points of view. very cool.
personally, i'm leaning toward establishing the business first, but i'll make sure to talk to cpa and attorney first. thnx guys!
Gifford
I have only two rental properties, and I have been advised by my business lawyer that my rental insurance is adequate coverage for the amount of property that I have. Once I get to my third or fourth property I will start looking into forming an LLC. Until then, I plan to save myself the extra time and money.
If my rental property is held by my LLC and lets say a renter sues me, can they go after my rental property as an asset of the LLC?
The reason I ask is that this property represents a large amount of my net worth, probably more than the sum of my personal assets (car, savings, etc) so I am wondering if it would be better if they sued me personally or sued my LLC and tried to go after my property.
Thanks!
Well this is a chicken vs egg question. I personally did not have a entity for the first 15 years. I also had partnerships. I was very lucky and very stupid. The lack or Corp or LLC shield could have been financially disasterous.
What's the CPA going to tell you?? Yes, I Ithink you can now afford a LLC?. A lawyer makes his living doing these thing. He needs to pay for his daughters braces.
Do you get auto insurance hoping for an accident.? Do you buy homeowners insurance hoping that your house burns down? You get a Corp or LLC to protect you from unexpected losses. Sort of a pay me now or pay me more later.
This is from someone who forms entities for a living: unless you'll clear $15k annually out of the business, it likey isn't worth incorporating.
The "corporate shield" from liability stands on four legs: 1) you didn't do the act complained of yourself (if you did, it doesn't matter whether there's a corporation, it's likely you'll be under the "V" in the lawsuit regardless); 2) you followed corporate formalities (held meetings and documented them, etc.--this is less onerous in an LLC format than in a corporation); 3) your company is adequately capitalized (there's one or more assets in there, such as a duplex, it's not just a paper shell); and 4) most importantly, you have adequate insurance coverage for the entity.
That's about all there is to it. In some states, it's a real hassle to deed a property over to an entity. The doc stamps may be at "fair market value" instead of "nominal". In Florida, there was a ruling that came down July 28, 2003 that deeding a property to an LLC owned in the same proportions as the owner(s) previously held the property requires only nominal doc stamps. Good news. Now if the mortgagees go along, everyone will be happy.
Should you form your entity before you have a deal on the horizon? Probably not. You can get the formation of your entity "rushed" for a few more bucks ... within 24 hours in a lot of cases. Shouldn't mess up your closing at all.