Entity formation: worth doing it myself?

[Alex M.]

Hi all,

Im wondering if it makes sense for me to try to set up my own legal entities... I just got quoted $1500 per entity not including filing fees to set up an LLC, and was also told to set up an S-Corp management company "to attempt to shift the liability from the asset holding entities to the management company." and that "You probably should consider a management agreement that contains indemnification provisions for insurance claim purpose as well."

I have 3 short-term rental properties in TN, and run a dozen airbnb rentals out of NYC on leased properties.  Im looking to continue buying more short-term rentals in TN, and perhaps in other states in the future.

Love to hear thoughts on:

1) If I decide the LLC is the right route, does it make sense for me to try to set it up myself as a learning experience or sucker up and pay the man?

2) Is it hard to set up the S-Corp management company on my own or is it best left to the experts?

I want to avoid paying thousands to set up these entities, but do want good advice in terms of protection and specific to short-term rentals.

Thank you

[Jenifer Levini]

Here’s an answer from a lawyer's and real estate investor’s perspective. As an investor myself I understand wanting to keep expenses as low as possible to maximize profits. However, as a real estate lawyer, I understand why it makes much more sense to engage a professional’s services.

An LLC is a legal entity used both as a business management tool and a means of limiting liability. Everything about how your business is going to operate is going to be determined when you create your LLC's Operating Agreement. When I work with real estate investors I counsel them on: the roles each person will play, the obligations to each other, how the banking and finances will work, the taxes, the obligations to buy out each other and the spouses of each member when something goes wrong like death or divorce, the roles of investors, partners, employees and managers, setting up DBAs, leases and other contracts, and dozens of other aspects of running their business. In other words, I see my role as a lawyer is to make sure they have thought through and understand the laws about every aspect of their business. Then, that they manage their business along the lines that they decided in the formation process.

When people use a site like Legal Zoom, theyre getting a generic agreement. Frankly, theyre choosing among options that they don’t really understand. And end up with a document that they never look at again, believing that this somehow gives them some protection.

Ive read the law suits that resulted from every word of the Operating Agreements. So when I choose the words in an OA, I understand exactly what can go wrong or right by using that word.

One of the uncertainties of entity formation is that your entity will not protect your other assets. For example, you'll be sued by a tenant and end up losing the home you live in or other assets. This is from a legal attack called "piercing the corporate veil." In California, Legal Zoom has lost several huge class action lawsuits because the entities they formed did not protect the LLC members in the LLCs they formed. If youre using Legal Zoom, you might want to google the lawsuits they've lost in your state to see how severe the problem is.

When you hire a lawyer who works thoughtfully with you to form your entitie(s), you have a team member who will explain things and protect you. Knowledge is power. Having someone who will go to bat for you is invaluable. The wealthy people all have lawyers who create their entitles because they know that having this safety net is worth more than a few thousand dollars. And when something goes wrong, the price of a lawsuit starts at $20,000.

It’s prudent to invest $1500 to potentially save $20,000++ and years of misery if something goes wrong.

If youre always looking for the cheapest ways of running this business, you can safely assume that things will go wrong and you will need the liability protection of your LLC. Real estate investment is a long game.