I need the LLC basics

[Matthew Gutting]

I have spent the last couple of days going through the forms reading about LLC's as they pertain to real estate. My wife and I have already decided to start one, and we have sent the papers to the state. Having been a property and casualty insurance agent, I understand the liability side of it. (Or at least I think I do.) However my questions are more basic then that, I'm wondering where do I find the rules? How do I operate the LLC? What do you mean by real income versus passive income or what ever the different types are? How do I move a property under the LLC? How do I pay my self? As you can see there are many questions, and I can't find a good source of information to help me answer them, any advise would be greatly appreciated. My wife and I want to do it the right way, and not just fly by the seat of our pants. We are looking for the nuts and bolts, great I now have this how do I use it?

[Jonathan Twombly]

@Matthew Gutting There is nothing magic about doing business under an LLC form. It is merely a legal arrangement, like a sole proprietorship, partnership, or corporation. They each have different tax and liability advantages.

A sole proprietorship is when you do business under your own name or a DBA that is not a separate legal entity. You get taxed individually and you have unlimited liability, meaning that your creditors can come after your personal assets.

A partnership is like a sole proprietorship, except that there is more than one person involved. You are taxed directly and you have unlimited liability for the partnership's debts. That means, if your partner runs up debts in the partnership's name, you are responsible for them personally.

At the other end of the spectrum is the C-corporation. In a C-corporation, your liability is limited to the value of your shares. But the corporation's income is taxed and then dividends to shareholders are taxed again.

LLCs were invented to give businesspeople the liability protection of a corporation with the tax advantages of a sole proprietorship. Thus, your liability is limited to the value of your shares in the business, as in a corporation. But you are only taxed as an individual, as in a sole proprietorship or partnership, so there is no double taxation, as with a corporation. Just make sure that when you form the LLC, you check the box that says you want to be taxed as an individual or partnership, as the case may be. (The LLC itself, however, will have to file its own tax returns, so there is a cost associated with forming and running and LLC.)

Now, in terms of properties, you should have each property under its own LLC. Banks will often require this. (It's know as the single-purpose rule. Each property must be owned by a single purpose entity (SPE) that owns only that property and nothing else.) You may also want to have a separate LLC for your promotional company, and to hold your membership interests in the property-level LLCs. (Some people even take it another level, where they charge a management fee through one LLC and hold their membership shares through a second LLC, but the costs go up as each LLC must file its own tax returns, etc.)

The entity form you choose is really only the beginning of your concerns. The most important thing is to make sure you have a good accountant! And be sure that you keep good books, or your year-end tax reporting will be an expensive nightmare! If you cannot do bookkeeping yourself, then look into outsourcing it -- you can get cheap, reliable bookkeeping help in India, through such companies as Brickwork.

Hope this helps!

JDT