When is the best time to set up an LLC?

Question

I spoke with an attorney about setting up an LLC. I was told that I needed to get a property first before setting up an LLC and that it depends on my investment strategy. However, I have heard the exact opposite as I have been learning more about real estate. Any thoughts on this?

Janea L. · Answer

It seems pretty straight forward to set up an LLC. I have done it once before. I have been confused about the when to do it for my REI business so thanks for the explanation.

Nathan Gesner · Answer

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.

Chris Seveney · Answer

@Janea L.

LLC is not needed

Bob Stevens · Answer

Its a very simple process , you can do it.. but as mentioned you do not need one, ,,,yet, find a deal,1st, that is the most important part of this crazy puzzle,

Doug Smith · Answer

You don't need an entity to flip...just if you get a loan through an institutional lender unless you're going with conventional financing. Most lenders want to make it "commercial" to avoid a lot of the regulatory hassles, so they want to lend to an entity. If you go with a Fannie Mae or Freddie Mac loan, they are going to want to lend to you personally. You don't have to get an entity to flip, but some types of financing require it.

Doug Smith · Answer

Every state is different, but here in Florida, setting up an LLC through the State's Department of Corporations at www.sunbiz.org can be done on-line in a matter of minutes. You follow it up by getting EIN (remember to save the SS-4 form you download at the end) at www.irs.gov . That's all it takes here. I'm sure each State has it's own way of doing things. Some states like NY might be more difficult and require attorneys. If it's a single-member, it's simple. We do it ourselves when we need one and it's easy...so easy in fact you can probably wait until you find something, but know your State laws first. If you want to do loans for flips or DSCR loans, you'll need an entity of some sort. If you simply want to buy a property two in your own name and you have enough income to carry multiple mortgages with a Fannie Mae or Freddie Mac loan, then you don't have to have one, but Debt to Income rations become an issue as you start to scale up. Good luck to you!

Richard Loniewski · Answer

In NJ it's a simple process took me 20 min online, so I Just form them myself, make sure you gent an EIN number as well

Jared H. · Answer

This is not legal advice and I'm not an attorney. If the purpose is solely for legal protection, remember that it is limited. After a lot of research on this subject (and some formal education), I personally think it's not worth it to form a SM-LLC, that veil can easily be broken in court and you're now liable again. The additional hassle of costs, rules, paperwork, etc... It's simple to form but I don't think it's beneficial for RE investors aside from surface-level anonymity (Members can still be revealed for anyone serious about finding out). I do form for other purposes but not for real estate and I do it myself through the secretary of state, I don't recommend hiring anyone for filing, it's easy.Where those protections would be most beneficial is in a legitimate business setting, no mortgages/loans under your name, all financed to the LLC, employee's and other business partners (MM-LLC), etc.. Complete separation of you as an individual to these properties, no commingling. In this case, it would be difficult for a court to pierce the corporate veil.Overall, not necessary unless you run/prove in court, a legitimate business where you can truly take benefit of the limited-liability aspect.

Luka Milicevic · Answer

I set up my LLCs before purchasing properties.

Personally, I did not use an attorney to set one up. It took me maybe 5 minutes on the city website to set it up and get it registered.

Konstantin Ginzburg · Answer

Yes, there is always a possibility of that happening so that will always be a potential concern to take into account. However in my experience, that clause has yet to come up for me personally nor has it come up with any other investors in my network.

When is the best time to set up an LLC?

Most Popular Reply