LLC or not?

[Account Closed]

So me and two of my friends are going into REI together. We plan on purchasing multi-fam units and renting them out to people. By the end of this year, we plan on having two properties; one we live in with an FHA loan and one investment property. Long term we want to expand to have at least 5 houses within the next 4 years. Would it be smarter to have all 3 of us on each title and worry about an LLC later, when we have more properties; or make an LLC and have the title under the LLCs name? Thanks

[Jon Holdman]

Tax-wise, this has no effect at all. A multi-member LLC is treated as a partnership. But you've already created a a partnership. The partnership needs to file a return and send the partners K1's to use for preparing their own taxes. You CPA (you have one, right? If not, get one) can help you do this.

An LLC will help formalize things. But more important than the LLC itself is the operating agreement. That would document all your agreements regarding the properties. You need to do some serious thinking about all possible issues. Like what if someone needs money and want out or partially out? What if a property needs money and someone doesn't have their share? What if someone gets married? What if one of you dies? ETC. You need to do this NOW (LLC or not) so you have something to fall back on when disagreements arise later. And, rest assured, they will.

I have done this. I think this is a bad idea. Forming an LLC will help set things up more cleanly, but the real key is to have a thorough understanding of how the partnership works. Disagreements will arise. If you don't set yourself up right now to handle those, you're going to have a tough time later.