Some LLC Advice and Questions

[John Ingram]

Hello to all you fellow entrepreneurs! I have a few questions about possibly starting an LLC. I was reading through some of the FAQs from the stickies in this forum as to not create another thread that was posted 32 times but I think I'm at a lost. I apologize.

I suppose first things first. I reside in PA. The real estate I'm investing will, more than likely atleast for now, will be in PA. I'd like to incorporate here in PA. At first I thought just incorporating was enough for my personal protection. So here's my line of question for you savvy business men and women:

1. Does anyone know exactly how to incorporate here in PA? Now I tried to do this somewhat on my own but I traveled to the Chamber of Commerce, to the Courthouse, to another destination that I can't quite remember, to the county website, and I have yet to figure this out. I know it is a simple procedure. I know it cost about $150. I just don't know where to file any paperwork or find any paperwork to fill out. I kind of want to avoid LegalZoom and website's such as these due to my inexperience but also because it seems cheaper doing it on your own. I didn't think I would need an attorney for a simple LLC but that leads me to my next question.

2. As I mentioned above obviously I'd like the LLC for my personal asset protection. Do I need an Operating Agreement? The only person on the LLC would be me. I suppose to keep things "tidy" I could have one. What would I need to have in order to ensure my protection of my personal assests?

3. Afterwards when I do incorporate I'd like to build the business credit as quickly as possible. What is an efficient way to do this? How soon would a new business qualify for a mortgage? I guess I'm curious and also trying to gauge how quickly my business can get into acquiring capital from investment properties. I was thinking it was something like ones personal credit. Open up about three cards, maybe a secured CD just for the installment line, I'm not sure. That's why I'm asking you fine ladies and men.

I just wanted to say thanks to all those that read and those that respond. It is truly a blessing having a community like this.

Much success!

John

[Chris K.]

@John Ingram

1. Incorporation. Google "PENN File" and click on the first link. They will take you to the website where you can file all the documents online. You need to register and do a bunch of things, but virtually everything is done on that website nowadays. 

2. Operating Agreement. Yes, you need one. Setting aside the legal reasons that we don't need to get into, there are practical reasons. One of them is that not having an operating agreement is telling the whole world (e.g. bankers, title companies, insurance agents, CPAs, etc.) that you have no idea what you are doing. For example, if you are going to have an LLC, you will likely need to deal with commercial loan officers at some point. When they talk to you, they are trying to determine whether you are a person that they want to lend money to. Not having an operating agreement (or otherwise not being on top of things) is a good way to tell people not to lend you money.

3. Drafting an Operating Agreement. For a single member LLC that's going to just hold real-estate, you can probably get by with forms that are floating. But just make sure that the operating agreement doesn't contain "weird" terms. Because people draft generic forms to be somewhat applicable to a lot of different situations, you can often end up with nonsensical language. As a general rule, if you read something and you can't understand it, you probably shouldn't use it.

4. Asset Protection. You talk about asset protection --- that's somewhat of a complicated topic. I suppose forming an LLC is one part of it, but there are other considerations as well (e.g. your marital status, insurance policies, 401ks, etc.). This is probably one area where you want to actually talk to an attorney about.

5. Business Credit. It's not too different from building personal credit. Once your LLC starts borrowing money, you will start developing a credit history. Some vendors (e.g. building material suppliers) sometimes extend credit as well, and some of them can help you build credit as well. Now as a practical matter, all lenders will require the members of the LLC to guarantee any loan you get from them. I know businesses that make over $10 million a year and the banks still make the owners guarantee the loans. It is what it is.

As for getting a mortgage under an LLC, business credits generally doesn't matter. Again, you are going to personally guarantee the note so they don't care if the LLC was formed the day before you applied for the loan. What's more important is: (1) finding the right bank (all banks have different standards and you generally want to start with small banks); (2) knowing your stuff; and (3) finding the right deal.

Incidentally, one reason to work with professionals (whether they are lawyers, CPAs, realtors, brokers, or whatever) and one reason to network with experienced investors is that many of them often work closely with these loan officers. There is a world of difference between someone introducing you to a loan officer versus you just cold calling them. 

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 as legal advice. Always consult with your attorney before you rely on the above information.