When To Create an LLC?

[Brandon C.]

Multiple sub-questions when I ask this because I get pretty confused on this topic. When and why do I need to set up an LLC (For rental investing and flipping)? Will having an LLC for 'each' property do any real justice? Or would it just be pointless in the long run and just be costly? My idea was to set one up (LLC1) for rentals with an umbrella policy and only set up a different one (LLC2) when doing a joint venture. What's the best way to go about this?

[David M.]

@Brandon C.

The more formal way to go would be with your Option 2. You want to leave your holding LLC "clean." All the liabilities should be contained in sub-LLC's so that they can be discarded as necessary along with the associated liablity.

If you are going to buy anything into a LLC, it should be purchased with that LLC. Otherwise, you will probably get into the same problems as other when they buy a property personally, then try to transfer it.

Learn about maintaining your "corporate veil" and not to "pierce" it.  Once its pierced, you've lossed your legal asset protection.  The easiest way to screw up is co-mingle funds.

The primary issue with using LLC's for long term investment is the financing. LLC's can only get commercial financing which is more expensive and with worse terms than the usual conforming residential loans. This is why many of us use insurance and umbrella policies. The insurance mitigates the risk while being able to take advantage of cheaper financing. Of course, this isn't as wise with larger properties...

You need to determine how much risk you are willing to take and how much your want to pay, both in direct costs and administrative time, to layering up with LLC's. Each LLC will need its own bank account at a minimum. There is more bookkeeping / accounting required to keep track of the funds and moved them around correctly. For example, using your option 2 structure, lets assume you needed to use funds from Rental 1 to help with your flip. You'd have transfer the funds to the rental LLC, then to the holding LLC, then to the flipping llc.

You want to keep your long term investments separate from your short term investments for liability reasons.

Just the same way some say to use one LLC per rental, some use a LLC per flip. The latter is necessary usually if using hard money loans. Also, by discarding the LLC you also get rid of the liability the property carries. For example, what if there is an electrical fire a year after you sell? They could come back to sue you (right or wrong..). If everything was operated out of the LLC, there is nothing to sue for...

I hope this helps.  Good luck.