Type of legal entity?

Question

Plan on acquiring a 2-4 unit in RI/MA next year with my business partner, I believe getting a LLC is the cheapest form there is compared to others options. But I have some questions I want to ask experienced investors of their first time.

question:

1. Will the lender have an issue I want to put the property in an LLC when getting an mortgage?.

2. Is it better to put the property in our name, to get mortgage then transfer it to an LLC?.

3. When you have or plan on acquiring multiple property, I know multiple LLC are costly how do you solve this problem?, i.e series LLC?.

4.  Besides getting the LLC, what other legal ways can I separate my property/LLC from our personal name?.

5. When acquiring first investment property besides the agent, loan officer what other people should be have on our team?, to make sure all our ducks are in a row.

6. Where can I find more information about lenders and entities?

Christian Carson · Answer

I posted my thoughts on the series LLC here:

http://www.biggerpockets.com/forums/12/topics/1420...

I'm not a fan. It's another one of those situations where the potential benefit is illusory, and probably outweighed by the cost of compliance. The types of savings offered by proponents of the entity run exactly contrary to well-settled veil piercing rules
(separateness, capitalization, etc). I'm willing to wager that the series LLC is not going to gain traction nationally because of this.

Christopher Mendoza · Answer

@Abou C.

Hi Abou. I didn't realize you posted follow-up questions. There are series LLCs that, for the sake of illustration, are akin to a tree. Each individual series is similar to a branch on a tree. There is some concern in the legal industry, I deal with hedge funds, that the series LLC concept is still untested in the court system. There is a possibility that a court may collapse all the series LLCs into the main LLC for liability purposes. For example, not all states recognize series LLCs, so a court in a state that does not recognize a series LLC may disregard the series concept. I am not sure if series LLCs are recognized in Mass or RI.  In addition, because these entities are statutory creations, there is some ambiguity as to whether each series can enter into contracts, or if the Series LLC, itself, needs to enter into the contract. Some states have yet to clarify this issue. As for opening bank accounts, you will need to get an Employer Identification Number (EIN) for your LLC. The banks may want to see your operating agreement and will need the LLC EIN to open the account. The bank will then open up the account on behalf of ABC, LLC.

Based on your initial post, I assume that you are going to hold these properties for a long time. So, you are probably concerned about asset protection (protection from creditors), liability protection (protection of personal assets), and asset segregation (separating your assets). You may not need an individual LLC for each single property. Piercing the corporate veil can be done, but it is extremely difficult. Generally, courts will pierce the veil in issues involving fraud or scenarios involving egregious failures to adhere to entity formalities, e.g., you start using the company funds as your own personal funds without proper documentation, such as a loan. So, you probably don't need to go out and start forming multiple entities or a series LLC. In addition, if your entities are not sufficiently funded, expect counter parties (such as lenders) to obtain personal guarantees from you and your partner.

The biggest part of your plan should be the insurance policy. In my limited experience defending companies with insurance, the lawsuits are aimed at capturing the insurance money. For example, Company A is sued. Company A has insurance coverage that is up to $1 million. The main talking point in settlement in settlement is how much of that $1 million insurance coverage is available and negotiable. So, if you get insurance for $500,000, expect negotiations to center around that $500,000 mark. If you get insurance for $1 million, expect negotiations to center around that $1 million mark.  You should call a few insurance companies and they should provide you with some basic pricing and information.

Please note that the above is general in nature. If you need detailed advice, you may want to talk with an attorney. In addition, talking with an attorney that you have an attorney-client relationship with will help maintain your conversations privileged. I hope this post has been of some use.

Christopher Mendoza · Answer

@Abou C.

Some of the other BP Members should have some insight about your other questions. I can, however, address your questions regarding LLCs as a form of limiting liability and the complexity and money involved in forming LLCs.

Although, LLCs do limit liability, an important part of reducing your liability is having the proper insurance. Nevertheless, there are some key aspects of an LLC that may be beneficial for you and your partner. While the formation of an LLC is rather simple, most of the work concerns the operating agreement, which establishes the rights, obligations, and duties of the LLC members and managers. In particular, the operating agreement of the LLC can function as the business plan for your venture (profit allocation, distribution, voting rights, etc). For example, something as simple as setting up approval of all members/managers if the LLC is going to make a purchase above a certain monetary threshold can be done through the operating agreement. Further, the LLC will provide you with the flexibility to revise the operating agreement or introduce new LLC members in the future to accommodate the changing landscape. An LLC is not always necessary, but it is always worth it to understand its usefulness.

If you have any particular questions about entities, feel free to ask me. I am comfortable with these entities.

Abou C. · Answer

Thank you Christopher. Yes we plan on buy and hold but long term with the company we want to become a private equity firm for real estate. We are starting with one so we wanted to make sure all our ducks are in a row and we speak to legal, accountant.

Abou C. · Answer

So before we even buy a property we should form an LLC and when its time to acquire a property its all under that LLC and not our name. And if we plan on doing that would finding lending harder vs personal name?.

Abou C. · Answer

Hello Christopher

for example we want to name our company say ABC,LLc ( holding company), which file another llc to own the investment property so we limit liability that way from the parent company. But filing 100 LLC is expensive, so which type of LLC are there which will offer liability and let us have multiple LLC minus the parent company (ABC,LLC). Also what type of insurance should we look into, and which company have you found to be investor friendly or just generally a great company to buy insurance from?.  And how does one separate all LLC's bank accounts so each one is its own company.

Type of legal entity?

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