LLC or not?

Question

Tyler W. · Answer

@Sam Masiello I agree with most everything you mentioned. Splitting your assets into separate entities does create an additional layer of creditor protection and is a smart way to operate.

You also mentioned that you're planning on quit-claiming your properties into one or more LLCs. Let me offer a couple words of caution. First, many banks include acceleration clauses in their mortgage loan agreements, which may require immediate payment of any outstanding balance if there is a transfer of ownership. (And transfers of ownership includes the transfer from your name to your LLC.) Also, I would talk to your title insurance company instead of quit-claiming this yourself. If you go to the company that did the original transaction, they can provide a warranty deed for fairly cheap.  The idea is that while a quit claim will accomplish your legal objectives, it might end up costing you more for a title company to produce another general warranty deed when it comes time to sell.

Joe Fairless · Answer

@Joseph C. - if you can buy with an LLC - do it. Then always have insurance to cover yourself as well.

An LLC is an extra layer of protection so it's a darn good thing to have in case you need it. But, on residentials I found that banks don't allow you to buy with an LLC because they want to go after you, not some shell of a legal entity, if you miss payments. Therefore, you might have to buy under your name if you're getting traditional financing for single family homes. This doesn't apply for commercial as it's standard to buy with an LLC since the bank looks at property more so than the borrowers (although they do look at both).

Justin B. · Answer

I don't understand why people are so down on entities.  An LLC is going to provide much more protection than if you don't have it.  Of course nothing is bullet proof.  It just makes no sense when people say, "You don't need an entity because they can just sue you anyway".  Joe, I understand this is not what you said per say, but that's how I read it.  There is a big difference between suing someone and actually winning.  I've seen case studies where someone has sued an LLC and the individuals, and the judge just through the case against the individuals out because there were no legal grounds to sue anything but the LLC.  That will never happen if you don't have an entity.  Why take that chance?

Another example is if you own 5 apartment buildings and they are all in one LLC, all 5 apartments are exposed to a lawsuit resulting from any one of the properties.  If they are in 5 separate LLC's, if something happens at one property, the other 4 are much more protected (not invincible) than if they were just in your name or the same LLC.

Yes, you need good insurance as well, but JUST getting insurance and holding the property in just your individual name is just not very smart.  Also, keep in mind that an entity also offers protection against creditors as well.

With all that being said, everyone's strategy is different and you should consult your attorney for the best setup for what you're doing.  Again, if nothing else, entity's are a deterrent.  I've had a lawyer tell me if he could only take one case and there were 2 on his desk (one being a sole propiertorship and the other an LLC), he'll take the SP every time.

Account Closed · Answer

@Sam Masiello,

If you got sued and it is in a LLC they will sue the LLC and anything in the LLC.

Joe Gore

Sam Masiello · Answer

@Joe Gore

Sorry for the confusion.  My point wasn't to be anonymous, but rather to provide a legal shield so that if something were to happen that would cause someone to want to sue me, they would only be able to hold me liable based on the assets of the business, not my personal assets.

I hope that makes more sense.

Account Closed · Answer

@Sam Masiello,

Justin B. · Answer

Go read these threads. Lots of good information:

http://www.biggerpockets.com/forums/109/topics/109553

http://www.biggerpockets.com/forums/48/topics/109603

http://www.biggerpockets.com/forums/51/topics/109757

Sam Masiello · Answer

BTW, here is another topic which may be of interest to you.  Good advice from one of the posters on using a lawyer for the legal documentation.  You can find plenty of free templates online, but your state may have specific requirements for things like your LLC Operating Agreement that the online templates may not provide.  If your docs don't meet the minimum state requirements, they may not protect you in court.

https://www.biggerpockets.com/forums/109/topics/109516-llc

Sam Masiello · Answer

I am fairly new to real estate investing, but have recently setup an LLC.  I primarily did this to create a legal shield between my personal assets and the rentals.  I am concerned that someone could potentially slip and fall on one of my properties (as a freak accident) and have them be able to sue me and come after personal assets such as my home and savings.

That said, the mere creation of an LLC is not enough.  You need to run the business as a business.  What I mean by this is to do all of the things that you would generally do when operating a business: setup a business checking account, run the affairs of your rentals through the business, and possibly even transfer ownership of the rentals to the business through a quit claim deed (I am in the process of doing this myself right now).

Another important document to have is an LLC operating agreement that govern the rules of engagement between yourself as an individual and your LLC.

Food for thought from a newbie to BP as well as real estate investing.  I am sure people who are far more seasoned in the space will be able to give better or more thorough advice and I look forward to learning from them as well, but this is the direction that I have been taking thus far.