LLC or Nah?

Question

Hello Members,

My friend and I are both first time investors and will be investing in real estate within the next six months. We have been researching whether or not to create an LLC. We haven't had too much success in finding guidance in this so we thought of posting this question in this amazing forum. We would also like some advice on whether the decision of creating an LLC or not would depend on which strategy and niche we chose?

Please find the questions stated below.

QUESTION 1: For a partnership, is it beneficial to create an LLC?

QUESTION 2: If so, why and what are the startup and sustaining fees for this? If not, what are the better options?

QUESTION 3: How will we benefit while filing tax returns?

QUESTION 4: Does creating an LLC or not depend on which strategy and niche we chose?

Looking forward to your response. Thank You.

Travis Thornton · Answer

Good advice in the above replies.  It's not a one-size-fits-all situation.  You do need to consult with a local attorney and CPA to set up a structure that fits your plan.  An LLC can be a helpful additional layer of relatively cheap "insurance" by virtue of the liability shield if the formalities are respected. The LLC itself does not drive the tax structure.  A multi-member LLC will be taxed as a partnership by default, but you can elect corporate tax treatment if that better fits your situation.  But once that election is made. there are restrictions on going back to partnership taxation.   The filing and maintenance fees will run a few hundred initially and a couple hundred per year (depending on the state).  Setting up an LLC Agreement properly with the help of an attorney will be a more substantial investment, but well worth it and even if you don't choose the LLC you would be well advised to have an written agreement in another form (partnership or tenant-in-common agreement).  Finally, if use of 1031 exchange treatment is part of your plan, there are issues that arise when an LLC is involved which must be considered.

Jake Thomas · Answer

I wouldn't worry about an LLC this early in the game. I would though have the parameters of your partnership written out so each of you understand what is expected from the other especially on the financial side.

No tax benefits for an LLC, you are still taxed normally.

Not a CPA or Attorney but they are the best people to ask these questions to.

James Paine · Answer

No LLC.

If you ever want to 1031 out of a multi-member LLC into 1-4 unit residential assests good luck!

Bill Exeter · Answer

There is a lot of good advice above.  It is not a one-size-fits all question.  The one thought that has not been addressed too much is your exit strategy.  You need to have a plan to go it, but you also need a plan on how you are going to get out.  Setting up an LLC with multiple members means that you are either going to be treated as a partnership or a corporation for tax purposes.  You need to discuss the various scenarios for an exit strategy, too.  Treating the LLC as a corporation for tax purposes can complicate certain exit strategies.  I know you are just starting out, but I would spend time with both legal AND tax experts who have a specialty in real estate.  You will be amazed at what you can learn in just a few hours with them, and it will be money will spent!

Jeff B. · Answer

Entirely  agree.  I went down that entity protection router far too early. After 18 yrs I deduced my exposure was less that 1% probability and ultimately threw the S-corp and LLC overboard as excessive cost to maintain.

Dave Toelkes · Answer

@Abhijit Joshi

First, please understand that, for federal income tax purposes, an LLC can choose to be treated as a corporation, as a partnership or as a sole proprietor.  For a multi-member LLC, your only choices are partnership or corporation.

Which you choose depends upon the investment strategy your LLC implements.  If you have a buy and hold for rental income strategy, then partnership is better.  If you are flipping, then the S-corporation is probably better.

In my opinion, a business entity is not really necessary until you have a high net worth to protect but this is not a widely held opinion in these forums.  Additionally, the LLC is governed by state law, and the registration fees and maintenance costs differ from state to state.  Visit your state's Department of State website for a schedule of fees.  If your LLC is established in one state and does business in another state, you will have registration and maintenance fees for the second state as well.  I suggest that you try real estate investing as co-investors for a while just to see if it works for you and for your co-investor.  Once you are sure that you and your partner are in the real estate game for the long haul, then you may want to establish a business entity.

As far as taxes are concerned, the partnership LLC and the S-corp LLC are both pass through entities and pass through entities tend to be tax neutral.  Generally speaking, this means that you would have the same income tax liability for your investment strategy regardless of the presence or absence of an LLC.  That said, if your LLC has substantial annual active income, the LLC treated as an S-corp may save you some money on the payroll taxes versus the partnership LLC.  You will have an LLC tax return to file regardless of whether you choose the partnership or the S-corp LLC.

Suggest you have this conversation with your attorney, your CPA, your insurance agent, and your estate planner -- preferably with all in the room at the same time.

Steve Ipock · Answer

I believe you should have an LLC for each property you own & a main LLC that owns them. If your properties are owned by you or one entity & you get sued from one of your properties they can get to any asset that it owns.

If each property has its own LLC and you have a main LLC that owns them the other properties can't be touched in a liability suit. Also you want to keep good records of your money each LLC makes. If you commingle your money that can open liability there as well.

Not sure about all states but in Missouri if you file the LLC online yourself it only cost 51.25 & no money to maintain the LLC.

Abhijit Joshi · Answer

Thank You Travis.

Abhijit Joshi · Answer

Thank You. This helps.

Ryan Dossey · Answer

I would set up an LLC from the get go. It's relatively cheap "insurance". It's going to make tax time easier. It's also going to make you look more professional. Make sure you read up on the corporate veil and how to keep it intact. No co mingling of funds, well capitalized, etc.

There is a certain $ threshold that once you cross it makes sense to be taxed as a corporation. Consult a cpa.

LLC or Nah?

Most Popular Reply