Best way to create an LLC?

Question

Hi everyone,

I have a question and was hoping I could possibly start a discussion on the topic.

After searching through some older posts and blogs, I still feel a little unsure as to what you guys think is best as far as starting a new LLC.  I read a great blog from Karen Rittenhouse and she said she suggested going to an actual lawyer to create your LLC instead of legal zoom or one of the online services.

Brandon Turner also wrote a great article on rocketlawyer.com and how easy and cheap it was to setup an entity.

I certainly don't want to rehash the exact same information that has already been covered before however I still feel a bit confused as to the best way to create an LLC based on the varying opinions people have.

For a straightforward, simple LLC without any partners that is for a beginning investor to hold properties under, what might you suggest based on the differing views?

I know LLC's have different options in which you can choose to be taxed by so do these online services help with that and do they also do a good job of filing the annual paperwork needed to keep the LLC current?

Thanks so much BP!

J Scott · Answer

That's a joke, right?

To be a tax preparer for H&R Block, you don't have to have *ANY* credentials, you don't have to have *ANY* experience preparing taxes, and in fact, you don't even have to have *EVER* seen a tax return before.  All you have to do is take their 70 hour tax preparation course and pass one test to get a job there preparing taxes.

As a comparison, to be a real estate agent in my state, you need 75 hours of course work and have to pass two tests.  Yup, new real estate agents in my state require more training than a tax preparer at H&R Block.

Btw, I went to H&R Block once back in the late 90s, and despite being pretty much fresh out of college, I knew more about tax preparation than the person who did my taxes...and I found two mistakes that they then had to call over their one CPA in the office to correct.  Had I not known more than my tax preparer, the returns would have been filed with the two mistakes.

I would highly recommend someone use TurboTax before they go to H&R Block...

Karen Rittenhouse · Answer

Nick:
I do all forms, contracts, corporate entity structuring, anything in any way legal not only with an attorney, but with one who is willing/able to defend the document they are creating in a court of law. There are many "attorneys" who will create documents for you but who are not litigators. I want to know the person who is telling me what to say is willing to defend it in front of a judge.

You can use any paperwork and entity structure you want, until you get to court. Then you find out how much this stuff matters. What is good paperwork worth? Priceless.

Chris Martin · Answer

Mike Hurney What are you saying? Creating an LLC in the way Nick described ("I am leaning more towards going to an actual local lawyer...") does not meet the topic at hand (Best way to create an LLC?)?

For Nick to be put "up against the wall " he will have had to perform a dishonest and unjust act as an individual, in the guise of his disregarded LLC. While 'piercing a corporate veil' may be a flashy phrase, the plaintiff still has to prove in court that Nick used the LLC to commit fraud or wrong. The organizer of the LLC is irrelevant.

Here's an example case where the corporate veil was successflly pierced. It is involved. The premise of this case is that there was a fradulent transfer of real estate. Note that this is an appellate case, so the first case was (incorrectly) dismissed. These cases are non-trivial and I doubt an average first year law student could prevail.

The rest of my post... removed rather than duplicate what J Scott said....

Karen Rittenhouse · Answer

It's the Articles of Incorporation and the Operating Agreement that are so important. They spell out what you do and why which is what dictates your tax advantages. You will not get that if you go the inexpensive route online. You also want your LLC structured properly or you get no legal protection. If not done properly, any lawsuit will leave you vulnerable by simply "piercing the veil" - proving you are truly the LLC and, ultimately, liable.

J Scott · Answer

You can certainly create it yourself if you want, though I'm sure he'd be happy to do it for you (for a fee).  The point is, in my opinion, you should be more concerned that you get the tax implications correct than the liability implications (again, unless you have significant personal assets to protect).

Not saying the liability part isn't important, but it's unlikely you'll screw that part up just by creating the LLC yourself.  Now, if you don't know how to manage/run the LLC in a way that will maintain adequate separate from your personal assets, that's a good reason to talk to an attorney.

David Beard · Answer

For our multi member OA, I think we paid $350 for a consultation with an experienced RE entity attorney and development of the document (as well as templates for various resolutions and handling the filing process with the state and the securing of a statutory agent).  It was well worth it to get the attorney's perspective on various issues, including member buy-out valuations/time periods, death/succession handling, percentage vote needed to take various actions, instructions on administering meetings, etc.  If properly worded, you can allocate the tax aspects (such as depreciation) in an disproportionate manner among members, for example.

The fee is a pittance in relation to optimally ensuring protection of your personal assets, and in relation to the value of the RE you will be dealing with.

Another benefit is your LLC will be more "respected" by trolling trial lawyers that are deciding whether it's worth it to sue you on a contingency basis.  They're less likely to think there might be legal holes in your documents and processes if you utilized an attorney.

It is a valid question to ask if you need to continue to use the attorney for subsequent LLCs that you establish that would be largely identical to the first one.  In this case, I did my own the 2nd time around, using the first LLC's OA as my guide, but only because the intended purpose was the same.

Bill Gulley · Answer

Well, Mike, as to your peace of mind with H&R, that is nothing but a marketing spin on federal law. Anyone who prepares a tax return for another is required by law to appear for any audit or court issue in connection with that return, it is not because it's some great benefit they offer. IMO, H&R is a W-2 1040 factory, I have had these folks as clients and I have yet to meet a degreed accountant. I wouldn't darken the door of any franchised tax machine.

I believe Chris posted an issue, if not here, elsewhere, about the unauthorized practice of law in connection with drafting an operating agreement.

Consider, the order of things when filing an LLC and when the documents or agreements become effective. First, the articles are filed, upon proper filing the LLC is born, then the OA becomes effective in the LLC. If you draft the OA for the newly created entity you could well be engaged in the practice of law. Your company is adopting a legal document that was not properly prepared. I can certainly see this being a valid argument, ultimately that destroys your LLC.

I drafted all my documents and did various business entities, looking back, probably should not have, but most were "approved" by our attorney, so there that is.

I suppose if you got the OA from and attorney owned site, it would be more fitting, but an attorney who is not qualified in my state is no more capable than you or I am to write an OA, so that may be another issue. Then again, an attorney may have affiliate arrangements to avoid such issues of state qualifications.

Passing legal documents drafted by an attorney is also an issue, copyrights and copying materials and the attorney who wrote it (or even sold the boiler-plate) was not compensated, so you're stealing the documents. I have seen this being an issue.

Next, a good OA is not a cookie cutter document. For example in a two member LLC of otherwise unrelated parties, arrangements made between members such as rights to buy out the other upon events of withdrawl should take into consideration the financial abilities of both and if they are not equal, then provisions should be made to level the playing field. Estate issues should be addressed, rights to buy out surviving partners, key person issues and delegation of duties are all issues that probably are not addressed in some form store OA. I'm sure the blank form types won't address various members having different rights as to voting and ownership. To an attorney, a legal document might be nothing more than inventory available for sale.

So, the best appoach initially, is, IMO, to draft your OA and outline the issues, then adopt the concerns, covenants and recitals generally used for similar entities, like those offered by sites. Then take that to your attorney and give that material to them to modify and create the final draft. This should save you money as your attorney won't need to interview you, investigate what you need and explain so much of the interplay as to the operations of the agreement. You should be saving alot of time from being on the clock.

IMO, trying to do your own OA or getting one off the internet or from some other investor is a mistake unless you are an attorney.  :)

J Scott · Answer

That's like saying I should eat raw chicken because...hey...cooked chicken can make me sick too.  Or saying that OJ Simpson should have gone with an inexperienced team of attorneys who took one 70 hour course cause even his highly trained team could have lost.

That's called a logical fallacy...

Agreed.  And I know enough that I'd choose a CPA over H&R Block EVERY SINGLE TIME.

The best preparer at my local H&R Block is unlikely to have even 1% of the real estate experience as my CPA.

Clearly you have a vested interested in H&R Block...there's likely nothing I can say that will get you to admit how bad a choice it would be to use them over a qualified CPA, enrolled agent or accountant.

Mike Hurney · Answer

@Chris Martin
No, I'm saying however you want to set up your LLC is fine but I believe it's the cart before the horse.
I'm hearing protection against frivolous suits as the reason but this is America anyone can sue anyone (or thing) and you could end up paying tens of thousands just to defend a potential piecing.

Two quick questions on a scale of 1-10 (10 being most difficult)
How tough is it for a beginner to find a deal?
How difficult is it to form an LLC?
Actually two more
How long does it take to find that 1st deal?
How much time to setup your LLC?

Thanks, Mike
PS @Nick K Sorry to get off track with Block and LLC formation, Hey Man how's that first deal coming? Kidding, be patient but persistent.

Mike Hurney · Answer

J  Scott Thanks J. You could end up with mistakes from a Broker also, despite their training and tests.
TurboTax is great for filing a short form but try calling them when you get that IRS letter, then the joke is on you.

I'm only saying the more you know, the better you are at selecting members of your team and the services you need.

Maybe you should try them again? 90's are a long way back. With your knowledge you should be able to sieve through and find the best preparer.
You could get their free 2nd look on past returns! and maybe have them do your next return. I'm very impressed with their Piece of Mind guarantee, imagine what a CPA would charge to represent you with the IRS or that they'd pay the difference on a mistake.
Thanks, Mike

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