Is there a such thing as too early or too late to Get an LLC?

Question

Purchased multi family in December of 2018 been renovating and close to getting tenant in soon... when should I go about getting a LLC should I have gotten it earlier?

Marcus Auerbach · Answer

How big of a MF, what is the rest of your portfolio worth and what is your net worth? Don't answer these questions here, just for yourself, because it will tell you if and where you need to set up these financial firewalls called LLCs. If you have only one 4 family you probably don't want an LLC and rather focus on running a sound business, don't show too much equity in the property and carry good insuarnce plus an umbrella policy. Good information in Brandion Turner's video about LLC's on YouTube. Most people who wonder if they need an LLC will concluded that tehy don't haver they have studied the issue. If you are big enough for LLCs you'll know it. No legal advise, just my personal opinion.

Weston Couch · Answer

@Eric Quintanilla Hi Eric, I work with a group that often deals with these questions. When I sit down with clients, I always discuss (1) their personal assets, and (2) what their current investments portfolio and other business ventures are before discussing (3) their future goals. Each of these variables will dramatically change the advice I give the individual asking me this question. Generally though, I break it down into the "five pillars" of protecting your assets.

The first pillar is avoiding unnecessary and risky activities (don't drink and drive, insurance generally won’t cover your poor decisions) and take good care of your investments(maintain your property, etc) - these simple steps will help you prevent lawsuits before they even occur.

The second pillar is a good insurance policy as that cover the majority of your exposure. However, insurance is limited because it only protects you from one type of liability: accidents/negligence. Insurance doesn’t protect you from any part of the sale or acquisition of a property (e.x. Somebody wanting to sue for you backing out of a bad deal or accusing you of selling them a property with defects like unknown termite damage). Insurance also doesn’t protect you from misunderstandings, especially those made in writing and email. What happens in these misunderstandings is that something goes wrong either in the sale or after, and then they sue you for some statement you made that they “misunderstood”. That lawsuit is a claim for fraud, and that’s what fraud typically is...a misunderstanding and someone being “injured” and wanting to hold the other responsible for it. Insurance never protects you from these kinds of claims and they happen all the time.

The third pillar applies after you have good insurance You need to protect yourself from what insurance doesn’t cover by compartmentalizing your assets. Compartmentalization means that if something happens to one property, people suing can’t touch you or the other properties. You should use either LLC’s (the old and expensive way) or a Series LLC (the new and more cost/time effective way). No matter where you live or where you own assets, I personally recommend the Series LLC to be a great tool for the individual investor who is planning to expand their operation, as it allows for you to scale infinitely for FREE. If you’re interested in using an LLC, this article  also further explains the advantages of a Series.

The fourth pillar is somewhat similar - you want to separate your operations from your assets. One company owns everything and does nothing (this is your SLLC a/k/a “asset holding company”) and a completely separate company handles all of your operations (this is a traditional LLC a/k/a “operating company”) For the operating company which serves as your face to the world and through which you do all your business, you establish a Traditional LLC to carry out the operations of your investments. The operating company takes on all of the liability that would otherwise blow back on you including: paying property management, paying contractors, collecting rent, marketing, etc.

The fifth pillar is owning everything anonymously. If people don’t know that you have assets, then they are less likely to sue because there’s no use in suing people that qualify for food stamps. This anonymity can be accomplished for free by using land trusts to own your companies as well as the assets. Trusts create this anonymity by removing your name from public record. Even if they can see you used to own a property, when properly transferred it will look like it was sold to investors. If they somehow guess you are the owner though, it still doesn’t matter because you would not be the owner. The land trust and the LLC are the owner of the asset/real estate, so even in the scenario that potential litigants guess, they would guess wrong.

Now, of course the application of these pillars can vary, and in your case, since you haven't rented it yet, you're probably fine(though there can be lawsuits that don't source from tenants). But, I know a lot of people still find them useful at your stage. If you're interested in talking about it, feel free to connect with me.

Gina Stern · Answer

@Eric Quintanilla whats that old saying... "Better late than never".

Eric Quintanilla · Answer

5 months it’s still not too late to do so even thonfor these 5 months I haven’t had tenants?

Javier D. · Answer

@Eric Quintanilla

Id focus more on getting some liability and/or unbrella insurance. Its fairly cheap.

Sometimes its a little hard to get traditional financing for an llc owned property.

CJ M. · Answer

@Greg Dickerson

Boy, managing seperste LLC's sounds exhausting! Not only would you have to manage seperate LLC's, you would most likely have to have seperate bank accounts for every LLC, no?

To the poster, you need to do what you feel comfortable with, but my goal is 1 LLC (with $1MM in liability protection per property) until I get $1MM in assets. Then I may start another LLC or get an umbrella policy.

Greg Dickerson · Answer

Yes you should put every property in a separate LLC when you purchase it. This was when you own multiple properties the one does not affect the whole. Also limits your liability in the event of lawsuits.

CJ M. · Answer

@Greg Dickerson

So if a person had 20 properties, you're suggesting they have 20 LLC's set up with 20 seperate bank accounts for each LLC?

Asking since I'm not a "pro"

Greg Dickerson · Answer

It’s not a big deal at all to have multiple LLCs and checking separate accounts for each one. Even for single family and small multi if you are renting. This is how the pros do it.

Talk to your accountant and attorney for proper legal advise and tax considerations.

Eric Quintanilla · Answer

very good feedback I appreciate everyone’s input thanks

Is there a such thing as too early or too late to Get an LLC?

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