Smart move to start an LLC?

[Caleb Stevens]

Would you start an LLC if...

- you owned 1 rental?

- you owned 4 rentals?

- you owned 10 rentals?

[Erik W.]

@Caleb Stevens, hi and welcome to BP!

What Derek alludes to and what I'm going to say directly is the number of units you own is irrelevant.

Rather, you must first define you WHY.  As is "why am I doing this?"  Get used to that phrase, as it will be hammered into your head for every decision you make between now and death.  ;-)

WHY do you want an LLC? Derek outlined several reasons. The most common is asset protection. If that is the answer to your WHY, then you must ask the following....

1) How much in assets do I have that need protecting?

2) What other protections are available to me that I either have or are lower cost/less hassle/more effective?

3) Do I understand the requirements and benefits of having an LLC?

I'll give a few examples of each of the numbered items above, but there are many others:

1) If your net worth is less than $10,000 and/or you make less than $40,000 per year income, most attorneys won't bother suing you personally.  It's simply not worth their time vs. the payoff.  In some cases, that might rise higher.  The bottom line is a lawsuit judgment is only worth what you can actually collect.  Now, if you have $100,000 cash in your personal bank account and earn 6 figures yearly....then you probably ought to consider asset protection.

2) Some assets are judgment proof from civil law suit and creditor judgments. Some retirement accounts, for example. If all of your net worth today is tied up in a Roth IRA, for example, that cannot be seized to satisfy a judgment provided they are covered under ERISA. See this link for more details:

https://www.nolo.com/legal-encyclopedia/can-judgment-creditors-go-after-my-retirement-accounts.html

You may also have certain rights to equity in your personal residence.  That would probably be state by state, so be sure to look that up and/or seek professional advice.

3) Each state has laws for how LLCs are formed and handled. You need to learn those and/or seek professional guidance to understand your duties and responsibilities, and then determine if those are more expense/hassle vs. running an LLC. A properly run LLC isn't just "set it and forget it." You have to create an operating agreement and resolutions whenever your company makes a major decisions, such as buying and selling property, borrowing money, distributing large sums of earnings, etc. Even single member LLCs can be a challenge in terms of financial record keeping. For example, you cannot co-mingle funds. Failure to follow the regulations may result in a judge "piercing" your entity and allowing creditors/judgment holders to go after you personally. One other example of a "quirk" in my state (Missouri) is any time I go to court for something like an eviction, I must hire an attorney to represent my LLC. I am not licensed to practice law in my state, so I cannot represent another person or legal entity, such as my LLC. Practicing law without a license is a no-no. I know, seems weird, but that's the rule in my state! So evictions I could DIY for $150 cost me $330. It's just part of the deal. Some states require you to pay maintenance fees yearly....another cost to consider vs. the benefit.

Asset protection is not something you can afford to learn as you go, because if you do it wrong and get hit with a massive judgment then you basically waste a lot of time, effort and money and still end up poorer. I suggest hiring an asset protection attorney to help you answer the above questions and educate you on anything else pertinent, especially if this is your first time doing this. If tell folks who ask me about this....if you're not willing to spend $200 for a 1 hour chat with a Pro, then you're not ready to form an LLC or invest in real estate, period.

I hope this helps.