When to get LLC or start a company

Question

Hello everyone,

I have been wondering this for awhile, but when is the best time to get an LLC?

I see a lot of people have LLCs or something related to that.

Is there a certain number of properties a person should obtain in order to get an LLC? What makes the most sense?

Can someone explain an LLC better for me?

Thank you!

Arlan Potter · Answer

Adam West(alias Batman?)

I do not like your advice, for me personally anyway, maybe not for anyone. Like it or not, anyone, any individual, who obtains loans will have to sign a personal guarantee. No rinky  dink LLC will protect the borrower.  I have read others who advise getting LLCs for each property, and I think if is a major waste of time and creates accounting nightmares. And for what? It may protect some personal assets, if something goes wrong, I am not sure what that would be, but you would still lose the property and if you are negligent, it may protect nothing. Some advise that if you get some assets paid off and then highly leverage a bunch more you might get an LLC for the highly leveraged properties. But even then, I am not sure what you or anyone else wants protection from. For single family homes, just good insurance and liability insurance should be all an individual needs.

I must not be a savvy investor. We have contracted to buy 3 single family homes and 8 four plexus this month, but not very savvy.

Who teaches people that LLCs are necessary---for everyone and every situation. I am sure they make a lot of money helping people to be savvy investors with lots of LLCs.

David Friedman · Answer

If the property is for investing and not for personal use, many people prefer to use an LLC. It is a tool just like any other form of entity (Partnership, Corporation, Sole Owner). An LLC can keep your personal and investment assets separate. Ever wonder how Donald Trump strategically goes bankrupt so many times and yet he is personally very wealthy? He uses LLCs and Corporations to protect himself and his personal assets.

In my opinion, an LLC is worth getting before you purchase your first property.

As far as getting traditional financing, if you have a property owned under an LLC you might have to personally guarantee the loan. At that point you are crossing the line between what is personal property and what is owned by your LLC.

Harmony Souders · Answer

Great information! Thanks for posting this question and to everyone that contributed!

Dillon Loomis · Answer

IMHO using LLC's for each property does not make much sense unless you have large amounts of equity in your properties. The main reason is the tax headache having multiple LLC's will create and the costs you will incur come tax time. The best way to decide is determining what you are trying to protect. If you have a high net worth and a lot of personal property that you want to protect, then you could consider it. If you are just starting out, with say a MFH owner-occupied, it does not seem necessary to create an LLC. Just ensure you have separate bank accounts for all business transactions and an escrow account to hold security deposits. In the grand scheme of things if you are a good manager of follow the rules and truly try to do well for your tenants, being sued should not be a major concern if you screen your tenants thoroughly. If you only have a couple thousand bucks in a savings account and don't own any properties of your own yet, it just seems like there isn't much to really protect in the first place, thus rendering an LLC useless.

However, I have heard there could be some tax benefits from establishing an LLC which I'm going to look into. If anyone agrees/disagrees with me, I'd love some input from an experienced investor!

Also, just throwing this out there...I love this community!

Account Closed · Answer

@Matt Heath  There aren't monthly fees for LLC's. I'm also in Wisconsin and set mine up through legal zoom. Aside from the initial fees and costs of creating the LLC there is an annual filing fee with the state of $25.00. There is also an annual fee of $144.00 if you want legal zoom to act as your registered agent. (A registered agent is a responsible third-party who is registered  in the same state in which a business entity was established and who is  designated to receive service of process notices, correspondence from  the Secretary of State, and other official government notifications,  usually tax forms and notice of lawsuits)

You aren't required to have them act as your registered agent so aside from the initial cost, which varies depending on who you use to set it up, there is only the $25.00 annual fee with the state.

Hope that helps. Good luck!

Elizabeth Colegrove · Answer

We tried the LLC thing because people told us it would protect us. After a ton of research and talking to two top lawyers we found it wouldn't help us at all. Now we self-manage the homes and have mortgages on all of them. Those are two key things that eliminated them for us. Everyone is different so I recommend you speak to a LAWYER one you plan to use if things go south. They will be the best source of information for you based on YOUR situation.

Mark Forest · Answer

Good article.  I think those who go through all the expense and trouble to set up an LLC are under the false assumption they are protecting themselves.  The reality is that if you self mange your rental properties YOU ARE THE COMPANY.  If you just tack on "LLC" at the end it will not deter a determined lawyer to "pierce the veil."  Now if you use PMs you may have an argument, but in the end the houses and the companies are yours.

I also just get a strong umbrella policy.  I am open to opposing arguments, but I just have not seen any good evidence.

Matt Heath · Answer

Thank you Garrett and David! That really explained a lot!

David Friedman · Answer

This answer is specific to California although I assume the answer will be similar to your state. Setting up an LLC is a one time fee and requires that you pay a minimum of $800 in taxes every year. So if you have an LLC, but never do any business, you would still have to pay the minimum taxes. The main benefit of an LLC is that if something goes wrong, your personal assets and investment assets are separated. If something goes wrong legally, you can separate your personal assets from being liable. If something goes wrong such as you find out that there are more expenses than you calculated, an LLC is not going to make a difference.

When to get LLC or start a company

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