New Wholesaling / Investment company creation - LLC or S corp decision?

Question

Hello all,

I've launched a new real estate investment company that will be Wholesaling and Acquiring properties using creative finance and other strategies.  But I'm curious, any suggestions and guidance around launching this company as a LLC vs. a S Corp?  Also, should I be creating 2 separate Entities?

One new Entity for the Wholesaling side of the business, and another separate Entity for acquiring properties for my Rental Portfolio?  I know there are both liability and tax implications to this decision.

Any help that can be provided based in someone's actual business history will be most appreciated.

Ed Adams

Nathan Gesner · Answer

Why do you need an LLC at all? You have no business. You don't even know if you'll be successful. You don't even know if you'll enjoy it and want to keep doing it after six months. Educate yourself on what an LLC is for and then really think about whether you need one or not.

An LLC is useful for two things: anonymity and legal protection. In most cases, neither is warranted.

Warning: I am not an attorney and this can be a complicated topic. Please note the information provided below is a layman's definition designed to provide a basic understanding for the general audience. You should consult an attorney or CPA for your specific situation.

ANONYMITY: When you create the LLC, your name is recorded on the documents and published on the Secretary of State website for all to see. So you're not completely anonymous. If you want to be completely anonymous, you can use a Registered Agent. The Registered Agent will record the documents on your behalf so only their name and information appears on the documents. I've done this with my properties because I'm well known in my small town and don't want people to know what I own.

LEGAL PROTECTION: By placing your assets in an LLC, you are legally separating them from your personal assets. If someone injures themselves and sues, they will be suing the LLC and not you personally. If your insurance coverage isn't enough, they could seize the LLC assets, but not your personal assets.

Additional thoughts:

1. An LLC is not free. You can spend as little as $100 to form an LLC, or you could use an attorney and spend $1,000 or more. There are also additional costs of operating and maintaining an LLC, like separate bank accounts, annual report filings, tax filings, etc.

2. There are rules to follow! If you fail to follow the rules, you may open your personal assets to a lawsuit. An example of this would be mixing your personal money and LLC money in the same bank account.

3. You do not need a separate LLC for each property or a series LLC! Don't make your life more complicated than it has to be. Most professionals will recommend a separate LLC for every $1 million in assets but I don't think that's necessary. In my case, I have residential rentals in one LLC, commercial properties in another, self storage in a third, and my real estate company operates in a fourth. Some have more than $1 million in equity while others have less.

4. The need for an LLC is grossly exaggerated on BiggerPockets and other websites. Have you ever heard of a Landlord being sued by a Tenant and losing property? I've been on this board since 2010 and haven't found an example yet. You've probably heard of big Landlords losing property, but only because they were flagrantly violating Fair Housing, running a slum, or otherwise violating the law in an egregious manner. You are more likely to be struck by lightning twice. The vast majority of lawsuits against Landlords are for wrongful eviction, security deposit disputes, and Fair Housing Violations. Your basic insurance policy with $300,000 in liability coverage should be sufficient in 99.999% of all lawsuits.

5. The best protection for you and your investments? Know and obey the law. I manage around 400 rentals with 12 years experience and have never been sued once. Even if I were sued, I document everything and obey the law, so I won't be found guilty. Even if I were found guilty, the cost would be in the thousands, not in the millions. Insurance would cover it, I would pay the deductible, and no assets would be lost.If you are in an area like San Diego where people are more likely to sue, a judge is more likely to find you guilty, and the payout is likely to be higher, then you may consider an umbrella insurance policy. This policy will provide additional coverage above what your existing policy covers. It's easy to obtain, costs very little, and doesn't require additional, on-going effort to maintain.

Rick Pozos · Answer

After about 15 years in business as a wholesaler, rehabber and having a few rental properties over the years, and owning a few notes my wife and I started a C-corp. The C-corp makes the money and pays us a salary. There are plenty of things that the corp pays for that lower the taxable income of the corp. For example the corp pays for health insurance for all of its employees (me and my wife). The corp pays for the auto expenses for all its employees (gas, oil changes, tires, etc) because it requires its employees to drive quite a bit to investigate and see properties. The corp also pays for a nice steak dinner at least once a month for meetings to discuss company business and also talk business with other investors. The corp also paid for a trip to Colorado for an Apartment investing conference. A trip to Orlando for FinCon.

But all of this is AFTER you start making money. AFTER you make money on a regular basis and you know that you are going to stay in the business.

ps we have never been sued by tenants, partners or other investors in 20 years. We don't want anonymity. We want people to know our name because we want people to work with us.