Investor · MA · Member since 2019 · 122 posts · 11 votes
The more I research the concept of forming an LLC, the more confused I get.
For the gist of my understanding, proper insurance should cover you for liabilities. But on the other hand, an LLC formed on a specific property limits your liability to only that property. In other words, without the LLC, and you own multiple properties, then they come into play for the lawyers to go after. I think this is my biggest concern with not having each property covered by its own LLC. Please opine.
My other concern is whether I should set up my business as a whole in an LLC. My thinking is that I will set up the business as its own entity establishing business credit.
If I were to go into a joint venture or short-term partnership, should I go in as an LLC?
Attorney · Slidell, LA · Member since 2016 · 322 posts · 179 votes
6y
You can't really compare insurance and LLCs. While they're both liability management tools, they operate very differently. Insurance helps protect you from liability, while the LLC helps limit its scope. Insurance, without an LLC, can protect you up to the limit of the policy. But if your judgment goes beyond your insurance limits, then everything you own is potentially at stake. An LLC without insurance provides no liability protection, but does limit the damage just to the assets owned by the LLC.
Investor · San Diego, CA · Member since 2014 · 21 posts · 7 votes
6y
Hi Keith. Each state is going to differ slightly, of course. But it also might depend on your price points and the type of real estate strategy you're implementing. Short vs. long term holds, etc. Most buy and hold guys use a single asset entity. Regarding flips, I've found a fair amount of HML will only lend to LLC's these days. My main company is an S Corp in CA, which we sometimes buy under depending on the financing piece. But I have now also created several different S Corps for properties. LLC's in CA are hit with a gross receipts tax which adds up pretty quickly because it's not based on profits but rather the price points of your assets, if flipping it. But I have 1-2 of those in case a HML requires title in LLC name. To your other point though, each property is going to be insured (or should be), but I'm mostly trying to avoid access to my company's assets or personal assets if a lawsuit is filed. I've also had to create an S Corp and dissolve it only after 1 flip (e.g 100 days) or so, which I don't like to do. Creating an LLC for each asset can be a bit costly if doing several at a time, depending on the size and hold time of your assets, especially if exiting rather quickly. And then shutting them down too, if all done properly, is rather cumbersome; not to mention tax returns for each. My strategy for my flips is mostly to create a new entity every few properties so if an issue ever arises down the line from old assets, it doesn't affect my current inventory. Unfortunately, inevitably folks think because you and are are investors or real estate companies, that we are responsible for their negligence. It's inevitable once you start having a track record that someone will try and push the envelope and hire an aggressive attorney. Of course, always try and chat with YOUR attorney ahead of this decision, or even your CPA too, as there are tax consequences for each strategy. I guess my point is, I would try and avoid using your name on any type of JV or partnership. Creating only one entity to protect yourself is fairly simple online, and not too expensive and will protect yourself in those scenarios. CA has a min. $800 tax, so again check with your CPA/state to see what the cost of having an entity is, just in case it sits there, you still might be liable for taxes/a cost. And establishing the business will be required for the business credit, as you know. If you are creating an entity and buying a high price point asset for a long period of time, then yes, I'd agree asset specific entities are the way to go in that scenario. Hopefully a point or two of all that is useful.... good luck out there!
Thanks a lot for the information. I think my game plan would be to set up my business as an LLC for the separate entity piece, joint ventures and business credit.
My investment strategy is fix and hold so I wouldn't need the LLC for the hard money. Btw, why do HML want to lend to LLCs?
If I come across a good fix and flip deal then I may have to form a separate LLC for that property to satisfy the HML.
As you stated, I should run this by my local professionals
Investor · Philadelphia, PA · Member since 2016 · 2k+ posts · 1k+ votes
6y
@Keith W. If you're looking to buy fix and hold (BRRRR), most would recommend not using an LLC as you're getting started. It adds a layer of complexity and cost that starter REI don't need. Plus, you'll get much better rates and terms on conventional loans in your personal name.once you hit 5-8 properties or larger MF properties (5+ units) then it'll be time to start looking the LLC route.
Good landlord and umbrella insurance should protect you from just about everything.
Attorney · Slidell, LA · Member since 2016 · 322 posts · 179 votes
6y
You can't really compare insurance and LLCs. While they're both liability management tools, they operate very differently. Insurance helps protect you from liability, while the LLC helps limit its scope. Insurance, without an LLC, can protect you up to the limit of the policy. But if your judgment goes beyond your insurance limits, then everything you own is potentially at stake. An LLC without insurance provides no liability protection, but does limit the damage just to the assets owned by the LLC.