Why do I need an LLC???

Question

I live in TEXAS. Not sure if the laws are different here. I currently own 3 rentals and hold them in my name. I am not sure if I need an LLC. I have good insurance policies in place as well as an umbrella policy. I have a grasp on the basics of what kind of protection an LLC provides. If I get sued, the plaintiff can come after me personally even with an LLC in place. Not much protection but gives a layer of anonymity. Also, What tax advantages are available to me with an LLC? I have all the standard write offs, depreciation, I pay my kiddos $6k each. And this year some of my W-2 income was tax free because I had a small loss with my real estate. What else is there???? I don’t want to pay a cpa thousands of dollars for something I am already doing. Thank you all.

Michael Plaks · Answer

@Travis BuckI will add one more item to @Paul Allen's list: you are not required to have properties, either. :)On a more serious note, there're 4 primary reasons to create LLCs and other business entities:legal protectioncontrol issues between multiple ownersfunding and bringing outside investorstax benefitsThere're no tax benefits from holding rentals in an LLC. LLCs are not required here in Texas.This mostly leaves the legal protection as the reason. I'm an accountant, not an attorney, so I cannot advise you on legal protection. However, I think you have a limited understanding of LLCs and asset protection. I recommend you discuss Texas LLCs (and, in particular, Texas Series LLCs) with a local RE attorney.Here's the website of a prominent Texas lawyer, David Willis, that provides excellent introductory information.I'm not sure what you meant by thousands spent on a CPA. Registering an LLC in Texas is a one-time $300, and doing it with a lawyer will add a few hundred. Not thousands, and CPAs should not form LLCs anyway.Also, if not already - check out the Alamo REIA.

Jay Helms · Answer

@Travis Buck - not sure about in Texas but in FL, the property has to be titled to the LLC to provide any coverage. Which if you have any loans in your personal name could cause some problems. If you own your properties outright, then a quit claim deed for $100 can title the property into the LLC. Sounds like you're making all the right moves, especially with the umbrella insurance policy. At least the way I do them :)And you're correct on taxes. If you had an LLC, you'll pass all rental income / expenses through your personal, so no real advantage over what you're already doing. The main reason to create and hold properties in a LLC is to help limit your personal exposure and for personal asset protection.

Michael Plaks · Answer

@Travis BuckI'm not an attorney, which is why I suggested you read David Willis' articles. As far as I understand, not being an attorney, it all depends on your LLC setup and on your business practices in running it.I'm not sure what was quoted by the CPAs on tax preparation. $600-$900 is very reasonable for LLC formation, especially if it includes $300 state fees. But once again - LLCs should be created by lawyers, not CPAs. Besides, CPAs who do offer this service may actually be breaking the state law.You can do your taxes for $40 and save hundreds of dollars in professional fees. But you may be losing thousands in the process if you're not doing it in the best way, without realizing it. It's just like selling a house without a Realtor and saving 6% commission. Often, you save $10k commission but sell the house for $30k less than you could, plus you incur extra $5k holding costs by delaying the sale. Not to mention your time.

Christopher Smith · Answer

I think you approach is sound. It's essentially the way I run my operations in my home state and out of state. LLCs are wildly over promoted, much of that promotion shamelessly panders to folks fear, ignorance and vanity. Keeps document mill operators profitable, but does little to really help folks that own a few rental properties (besides creating additional unnecessary overhead and adminstration).

Travis Buck · Answer

Thank you all for the replies!!! Michael Plaks , to my knowledge in TX, when being sued, a plaintiff can go outside the llc. As for the thousands $$$I speak of, I have been quoted between $600-$900 to form an llc. Furthermore, 2 different cpa’s quoted me between $2800-$3100 to do my taxes. This was with only one llc formed. Not sure why its so expensive? I do my own for $40!!! And get all the deductions I spoke of earlier. The only deduction I dont do is home office. Just a desk in the bedroom. THANK YALL AGAIN!!

Paul Allen · Answer

You are not required to have an LLC.If you have an LLC you are not required to have a CPA.Best of Luck in Your Real Estate Investing!