Should I FIRE my Law Firm?

Question

Hello BP!

Long story short, I've hired a law firm to form a single member LLC for the sole purpose of investing in rental properties.  However, when electing to be taxed as a sole proprietor (IRS default for single member LLC) or S-Corp, I feel I've been left to figure it out myself.  Now after talking to other investors the S-Corp election is mostly for Flippers and NOT suitable for Buy and Hold investors due to the IRS "restrictions" on Passive Income received from rent?

My problem is I feel if I'm going to pay some lawyer a thousand bucks I should be advised on the best route to take, not having to figure it out myself!  If that was the case I could've just went straight to my state's SOS website and did it myself and I would've saved $900.  Also, I never got to discuss this with the actual Attorney cause they just threw me on their Paralegal.

Should I say Fck it and bite the bullet and deal with it or should I go else where? Haven't paid yet but fees will be billed I'm sure!

Thanks in Advance!

Bryan O. · Answer

I agree with @Matthew Anderson. Your attorney's job was to set up a strong entity to hopefully never be breached and fit within all of the laws. Your CPA's job is to advise you on the ramifications of what type of entity you want to use. You had the cart before the horse on that one. Scratch it up to $1k paid for a good training course and move on happily :)  Best of luck and happy investing.

Chris K. · Answer

@Tim S.

1. Lack of Tax Advice. Here is most likely what happened: when lawyers sign up for malpractice insurance, they must inform the insurance company about their practice areas. For various reasons, many lawyers --- even those with above average knowledge about taxes --- often decline to seek tax-law coverage. The consequence of this is that the lawyers cannot give any advice about the tax structure of the entity. This is true even if they know the answer that's "correct" 95 percent of the time.

Most lawyers deal with this problem by having a good relationship with CPAs that can answer the client's questions. How did this law firm handle your questions? Did they recommend you a CPA or two?

2. Paralegals. In the firm's defense, this is common practice. Paralegals have a lower hourly fee than a lawyer, so they tend to work on matters that require some level of legal training but does not yet require the full attention of the lawyer. Gathering information you need for opening a single member LLC falls under that category in most cases.

3. "... not having to figure it out myself!" This doesn't have to do with the heart of your message and I don't think you necessarily meant it this way, but the general sentiment of this thought is worth discussing. Many folks have this idea that if you pay for a professional --- whether it's an attorney, CPA, property manager, contractor, etc. --- the professional will figure out everything for you.

In my opinion, this is a very dangerous mind set to have. Yes, it is true that you don't need to know about the industry as much as the professional to succeed as an investor (or in any business for that matter). But you also need to know enough to have a meaningful conversation with the professional. Without exchange of ideas between you and the professional, it's impossible to get the most out of the relationship. Not surprisingly, some of the most successful and brilliant clients I had in the past had above knowledge in virtually every area of their industry.

So while this doesn't necessarily excuse the law firm you hired, I would continue to learn and try to fill any gaps in your knowledge that you may have.

Matthew Anderson · Answer

@Chris K. is exactly right.  I have numerous discussions with my real estate investor clients about real estate investing and there's a fantastic benefit for both myself and these clients with regard to helping each other achieve our real estate investing goals in the most effective and protected manner.

Tim S. · Answer

Thanks everyone for the informative responses!  I recently spoke with another attorney and he advised me to seek a CPA so I'm meeting with a firm next week.

Meanwhile, I've decided to keep things as is and the LLC has been filed with the state.

Thanks again!

Chris K. · Answer

Matt's advice here is solid --- especially about finding a lawyer that also invests in real estate. To be fair, some of the best lawyers I've worked with never invested in real estate. And that's perfectly fine especially when you grow as an investor and need more specific knowledge. But often times, beginner investors benefit from working with folks who have gone through the investing process themselves. Having an attorney who also invests in real estate can often offer a lot of value that goes beyond mere legal advice.

Tim S. · Answer

@Matthew Anderson Lesson learned and I will definitely take this advise the next time!  Thanks!

Tim S. · Answer

I'm seriously thinking about it.  Just having a hard time swallowing I wasted a $1000 only to go to another law firm and pay another $1000 to give me the service I want.  SMH

Thelonious Jones · Answer

If you are thinking about it, you should do it and move on.

Should I FIRE my Law Firm?

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