Tips for forming first LLC?

Question

My wife and I are in the process of closing on a multi-family in upstate NY (our first property) that we plan to owner-occupy. I know the strong advice is to set up an LLC and transfer the property into that LLC once we close on it, to limit our personal risk. Does the LLC need to be established in NY, where we will live? Can anyone strongly recommend an alternative, or provide any other LLC-related tips for someone just starting out? Thanks!

Benjamin Burket · Answer

@Evan St. George, I don't know what your financial situation is, but the huge advantage of owner occupying is you can get a low down payment loan (3.5% FHA, 3% conventional, etc).  You wouldn't be able to do this if you purchased with an LLC.  As always, consult with an attorney, but I don't think an LLC is crucial if it's your first property.  An LLC is to protect your assets and separate liability.  If you don't have other assets, there's nothing to protect.  As you move forward in your investing, yes, you should put the properties in some sort of entity.

Scott Smith · Answer

I generally recommend investors to own properties under an LLC. The only real exception that I would make for that rule would be for new investors dealing with investments less than 50k, which is a pretty rare exception. The main reason you would want an LLC is in the chance that a lawsuit (in your personal life or regarding your investments) would either exceed or be excluded from your insurance policy. If that happens then the lawsuit can "spill" into anything your name is attached to.

In the case that there is an expensive "slip and fall" at your investment property you might find out that your insurance can refuse the claim, stating you should have known about the unsafe condition of the house. In this scenario you would end up being sued by the tenant and then having to turn around and sue your insurance company - or just take the loss. But if the settlement/judgment exceeds the value of the value of your property they can reach over to your house or other assets to cover the difference.

It's not a common thing, but it does happen. I cut my teeth in New York litigating these insurance companies and I can attest that these are usually rough cases - insurance companies have legal teams to push back on you, and even if they don't have a good case they drag it out for as long as they can to try run your bank dry. LLCs wont stop this from happening, but they can provide stop-gaps in your assets and put you in a better position to negotiate favorable settlements since they can't threaten everything you own. The best asset protection strategies generally include multiple forms of protection. So ideally you would understand what exposure you face and establish an asset protection strategy that is adequate for you and allows you to invest forward without the fear of something bad happening.

P.S. I do love insurance, I just don't rely on it solely. I rely on them for small claims and nuisance claims, since they are amazing at dealing with these for me. But you need to understand that insurance is a business, so they need to avoid the big claims in order to make their bottom-line look as good as they can. This article goes over the general approach I have when building up a new asset protection strategy.

Jake S. · Answer

I do think you would be okay with not getting an LLC and just getting a solid umbrella insurance policy, but I'd definitely consult with an attorney

Jake S. · Answer

Hey Evan! I'd suggest to own it in an LLC, but I recommend consulting with an Attorney to see what best suits your needs. Is this property 4 units or less?

Account Closed · Answer

Check into getting umbrella insurance instead. It's cheaper, easier to maintain (by far) and provides better coverage. When you have LOTS of equity start doing LLCs.

Scott Smith · Answer

Some states are more business friendly than others regarding the LLC laws, but it just comes down the the costs involved and the assets you are protecting. If you have a single property that is modestly priced, the extra effort probably isn't necessary. Some people like to take the additional steps for their peace of mind, but from a business standpoint it wouldn't be necessary. The main time people will start establishing LLCs in states that are more business friendly is when they begin scaling or establishing entities of scale (Series LLC or Delaware Statutory Trusts.) The slight difference in laws will fortify their strategy and the additional costs/maintenance isn't really noticeable at that point.

The main thing I would encourage investors starting off to focus on is getting their entity formed properly and learning how to operate them very well. If you tackle those issues early on you will have much less need to test which state's internal liability shield will protect you better in the case of a lawsuit.

Evan St. George · Answer

@Benjamin Burket, @Scott Smith, Thank you both for the good feedback here. It is our first property, and we're buying it as owner occupied. Ben - I'd likely be looking to transfer the property into an LLC oce we close, rather than buy it with an LLC.

Scott - really appreciate the thorough reply, and that makes sense to me. Do you have any insight on whether I should create my LLC in NY (where property will be) or explore other states. I've read that LLC incorporated in DE and NV can be more beneficial for tax and privacy reasons, but admittedly am just beginning to learn about our options.

Thanks!

Evan St. George · Answer

Thank you both. @Jake Stuttgen, yes it's a 3-unit home and we would occupy one of the units while renting the other two. Hope to move out at some point and rent the whole thing, but still worried about moving IN first...

Tips for forming first LLC?

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