Questions about starting an LLC
Hi everyone, I live in Pa, and I was wondering about starting up an LLC. So I've read I have to start an LLC in Pa because it's where I reside, but I could create an LLC in a state, let's use Wyoming for instance, that would be the owning entity of the LLC that I would create/own in PA to protect my privacy and my personal assets in case of a law suit. Does anyone in Pa have any experience with this specific structure or can give me information on the best route to take. Would I have to transfer ownership of my rentals to these LLC's? Would both LLC's be filing tax returns? How would I set up business bank accounts? Does any have a good accountant that has experience with real estate LLC's? How can I get business bank accounts, business credit?
it’s a lot, but any information on this topic would be great, thank you.
Most Popular Reply
LLC's can sometimes complicate things, just open a bank account for your rentals and use a program like quickbooks to do and manage your books. you could even hire someone for around $100/mo to do this for you as well
- Chris Seveney
@Derek Bleam
To Me, if it’s not broke don’t fix it - what is wrong with your current setup ?
- Chris Seveney
Just a couple of thoughts on LLCs.
I am not an attorney. Speak to an attorney before making any decision.
Setting up an LLC in a state with LLC anonymity is great for protecting your privacy; however, privacy is really the only additional thing you are achieving. It will not protect you or deter your property from getting sued. If your LLC is sued, you will be required to defend the LLC, your name will then become known, and the plaintiff's attorneys will amend the complaint to include you. Suppose you are personally sued; during the discovery process, you must provide information on all of your income and assets (including your LLCs in any state (with or without anonymity). Anonymity is great, but it only does so much.
I don't really have a setup. I'm in the process of buying my 3rd property, which will be my primary residence for my family and I, it will be our permanent home for a lil while. So then I'll have two rentals: 1 in Coopersburg, Pa and the other one in Quakertown, Pa. But my finances are getting hard to keep track of sometimes, I really wanted to get setup with a business account so it will be easier to keep track of expenses, mortgage payments, rental income, HELOC payments, everything gets handled through my personal account, at the moment. It gets really confusing at times, so I'm just kind of trying to figure out what would make my life easier, and I wanted to be more organized. I have two kids under 1.5 years old, work 50-60 hours a week, and I'm in the military part time, so it's ultimately a lot to keep track of and I want to set myself up for success and not screw myself in the long run.
LLC's can sometimes complicate things, just open a bank account for your rentals and use a program like quickbooks to do and manage your books. you could even hire someone for around $100/mo to do this for you as well
- Chris Seveney
Full transparency, I felt ashamed to admit this before, because I didn't do my research and jumped into something, but recently I was listening to Pace Morby YouTube videos about LLC's and they suggested before you do anything in real estate to protect your assets with LLC's, I already had property so I thought I needed to act on it and set up and LLC. So I used the company he suggested in his videos: Prime Corporate Services; I paid them and they set me up with 2 separate LLC's; one in WY for anonymity and one in PA where I reside, but besides that I know nothing of what I'm dealing with and from what I've seen on these threads is that I screwed myself and just made my life more difficult.
If I was a betting man, I bet you paid thousands of dollars for something that can be done for $100 and they have ownership interest or referral fees for those entities
- Chris Seveney
1. Complex setups don't offer much protection for most people. This is especially true if you're actively involved in your rental properties. Many states --- including Pennsylvania --- recognize what is commonly known as "participation theory," which holds owners/officers personally liable for the corporation's torts if they participate in them. For smaller landlords, this erodes protection quickly since they "participate" in virtually all decision making for their LLCs.
2. In Pennsylvania, transferring property between LLCs triggers realty transfer taxes. Doing this haphazardly can trigger a lot of tax payments.Disclaimer: While I’m a licensed attorney, 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.
It's better to have no LLC then the wrong LLC. Incorrect LLC setups can lead to a host of problems. So it's worth it to get a professional involved.
Its highly recommended to consult an attorney on the asset protection side of the LLC and a CPA for the tax implications of the structure.
- Daniel Hyman
As this is already done, what would be my best avenue of approach to handle things properly? Is dissolving the LLC a possibility? Or should i consult with a CPA and Lawyer who both specialize in real estate taxation and real estate law, respectively? To add further context, one of the big reasons I even did the LLC was to start a business account and build business credit to further fund my rental properties and possibly get into larger apartment complexes in the future.
@Derek Bleam What's not clear is which LLC is the deed holder, the PA or Wyoming LLC? At this point whichever is the deed holder is the only LLC that's truthfully needed. It would be unfortunate if the Wyoming LLC is the deed holder if the property is located in PA as I suspect you are likely getting hit with recurring registered agent fees (I don't have direct experience working with LLC's in Wyoming because there are absolutely no added protections incorporating in Wyoming but that's my hunch). Also, there is no correlation between anonymity and asset protection and anyone who tells you otherwise or sells you on creating unnecessarily complexed entity structures is either clueless or racking up legal fees at your expense. Generally speaking, it's most cost effective to acquire the real estate in the correct deed holder entity on day one as it becomes costly to transfer property. You will be be responsible for the transfer taxes equal to the assessed value, plus deed preparation fees and if there is already a loan, that adds another layer of complexity. If you are a resident of PA and the deed holder is also a PA LLC, drop the Wyoming LLC. If the deed holder is a Wyoming LLC, paying recurring registers agent fees (if applicable) is still going to be more cost effective relative to transferring the asset.
Thank you for the response. So when it comes to the LLC's I have 2 LLC's that this company created for me, as you know, one in WY & one in PA. The LLC in PA, where I reside, is owned by the LLC in WY as a sole member. And the LLC in WY is owned by me as a sole member and this LLC in WY has a registered agent in the state of WY. But, at this moment, neither of the LLC's hold deeds to any of my properties; both of the properties I own now are in my name, as well as the one I'm going to be buying in a few weeks. But In creating the LLC's I did want to then transfer them into the LLC and I watched videos that had said creating the Wyoming LLC added protection and anonymity for your assets, which I've come to find out is not the case, and transferring them into the LLC will be costly, so it seems that creating them in the first place was the wrong thing to do. So now to add to that, I'm not sure how the taxes are going to work by having the LLC's in 2 different states, I'm ultimately nervous now about consequences from tax implications and not filing taxes properly come time to do so.
@Derek Bleam You are still over complicating this. If the LLC's don't own real estate, what business activities are they actively or previously been involved with? If none, what tax consequences are you concerned with? Dissolve the Wyoming LLC, amend and restate the PA LLC with an operating agreement that meets your current needs and acquire the property you are currently under agreement on with the PA LLC. With respect to the properties you previously purchased, whether you decide to transfer those properties to the LLC is entirely up to you. You have to weigh the cost benefit analysis and what risks truly present themselves with the properties currently owned in your name.
@Derek Bleam, hi.
Pa LLC should be 2 member for limited liability protection to apply. Wy LLC, same 2 member LLC as well, but if your Pa LLC does show your ownership, there is no protection anonymity even if you have a Wy LLC with anonymity ownership. You can transfer your properties to LLC 2 member in Pa for the limited liability to apply to the properties. None LLC will pay taxes, but they will pass thru to you their profits and you will pay personally.
@Fulton Abraham Sanchez This is not correct. A single member LLC provides protections as long as the entity is operated correctly. I believe you are confusing the option to operate as a disregarded the entity, which has nothing to do with asset protection. It solely relates to the decision to be taxed as an individual where you can claim business income and expenses on your personal tax return. This does not diminish the protections of the LLC. There is no correlation between number of members to an LLC and asset protection. The way in which the entity is operated is the critical factor.
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Pennsylvania is a nightmare. One of my associates just went through this. She sent me the paperwork and it looks like they are still using the system Ben Franklin created like 250 years ago.
So good luck. I own 45 LLC's. 40 in Wyoming, 3 in Colorado and 1 each in Alaska and South Dakota. Wyoming is by far the best. You want to look into COPE.
As an attorney, I always put together a so-called structure chart of the intended investment structure alongside a filing checklist that I'll discuss with my client before we make any entity formations. This ensures that the client understands the intended structure and which entity will hold what assets, whether it be a traditional or series LLC, etc.
Another thing I also believe is often overlooked is the creation of a Management LLC (an entity that will hold no assets but will deal with all third parties (tenants, contractors, etc)). Also, don't forget to keep an eye out for the recent BOIR Filing under the Corporate Transparency Act for every LLC you form; hence, a checklist is always helpful.
@Carl Stenberg I can understand why management LLC's are utilized if there is an ancillary business that can operate on its own, but most on BP form management companies for asset protection despite adding no true benefits. At the end of the day, if there is a premises liability issue that arises, that management company LLC cannot stop a plaintiffs attorney from filing a claim against the deed holder. Perhaps the plaintiffs attorney even files a claim against both the management company and deed holder only complicating the litigation process. The example is for illustration purposes but in most cases when management LLC's are created by BP members its a text book alter ego. I see many, particularly on BP over complicate their asset protection and spend unnecessarily on entity creation without the businesses to support an independent management company. The irony in most cases is those who spend excessively for complexed entity structures can't even articulate what they are protecting against and operate the underlying businesses recklessly (improper insurance, inadequate or no contracts etc.) and end up in trouble anyway.
@Stuart Udis I think that's a valid point, but in my state, I don't typically see any harm in forming an empty shell Management Co to deal with third parties, given that the filing fee is relatively low, approximately $350.
As a strategy, I also like the idea of privity between the empty shell and any third parties, keeping them far away from the entity holding the actual assets without trying to pinpoint particular causes of action that could arise against the RE investor.
Overcomplication is indeed an issue, but in this case, I think having, for example, 3 entities instead of two (holdco, investco, and management co) isn't terribly overcomplicated.
I appreciate the comment, I always enjoy hearing from another RE attorney.