FORMING AN LLC: Prior to contract or during closing? Advice please...

[Stephen G.]

Hello All! 

Happy St. Patty's Day!

I am in the market for purchasing another multifamily property, but this time I would like to consider the possibility of rolling it under the protection of an LLC. This leads me to my main question - should I form the LLC prior to even having a property under contract or wait until I have a subject property identified?

I'm trying to think in terms of speed of sale. I'm not quite sure if organizing an LLC would prolong the closing process or if they are quick and easy to establish...

Also, I would have to go through commercial financing if purchasing through an LLC, so maybe even wait until after closing? However, I've found a commercial lender in my area that has terms that are fairly comparable to that of a residential mortgage.

Any insight would be greatly appreciated!

[Bill Gulley]

Get your ducks in a row, the LLC needs to be registered prior to contracting so that the contract is made in the LLC name. At settlement, you will need the registration and a statement from the Secretary of State that the entity was properly registered, a Certificate of Good Standing, that the proper fees have been paid and is free of any encumbrances, liens, claims, pending actions and I doubt you can get that "at settlement". It will only take minutes on line, but title companies usually don't act in matters of forming business entities, and there is more.

Contracting prior to forming an entity means the liability offered by the entity will not extend to that contract, it is personally made. Your contract is part of settlement and your title policy and settlement functions are based in that contract. A title policy to an LLC that didn't contract may not cover part of the title coverage that may extend to the contract.

Not saying that a property can't be set over into a LLC later on, that is a contribution to the capital account and taken in after the acquisition.

Financing can be more difficult, you'll need that certificate of good standing for the lender too, copy or the Articles and your Operating Agreement as well as consent of the member to bind the LLC in that transaction. A new LLC, you'll be giving a personal guarantee anyway.

If there are other expenses to account for, your LLC needs to pay those in keeping with good accounting form, not comingling personal funds with LLC accounts. You'll need insurance, pay taxes, settlement fees and all are then carried as the cost of acquiring the property. You need a bank account for the LLC!

To obtain a bank account, you need a tax number, request that from the IRS, you'll need that Certificate of Good Standing again. Need to show your authority to sign on the account.

Business licenses? If your city or county requires one, you'll be operating illegally if you failed to be properly registered. If the LLC is operating illegally, everything it does can have legal issues, things can unravel.

Take a full day to get your ducks in a row before you leap. Good luck :)