New York, NY · Member since 2017 · 144 posts · 75 votes
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.
Attorney · Santa Cruz, CA · Member since 2015 · 345 posts · 358 votes
8y
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.
Investor · Alameda, CA · Member since 2016 · 132 posts · 170 votes
8y
@Alex M. - shop around. We have used LegalZoom (a couple hundreds bucks) and paid our CPA+Biz services firm ($500) for real estate LLC formations. Our needs were relatively simple compared to yours, so it's tough to say if $1,500 makes sense for your needs.
At minimum, you'll want at least 3 quotes from well-reviewed entity formation professionals. I recently came across an awesome firm that even provides a "unlimited entity formation" package for RE investors if you pay an upfront fee (a few grand) and a modest monthly subscription. They were a combo CPA+legal+bookkeeping+biz services firm.
Legal zoom is a fine option, unless you have tailored needs or don't know what you need. You can head down that path, but if you can't size the risk you're taking... how risky is it?
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
You need one LLC. It is $600 at Keytlaw.com You don't want an S Corp if you are only doing real estate. It increases your taxes and your risk.
If you can defend yourself in court, no need to use an attorney to set it up, use legal zoom or some other online company
Or, you can just get umbrella insurance and forget about the LLC.
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
If you dont have any partners, I would say you can do it on your own. The hardest part of the creating these are what to put in the partnership/operating agreement. When you are the only one shareholder/owner, you have the flexibility to operate the way you want. There is no special allocation for tax matter and stuff.
Generally, if you dont have a provision on your agreement, the state statute takes precedence, so you might be ok from the liability protection standpoint. Meaning you can't miss a clause in your article or incorporation and not get liability protection. If you had multiple partners, this would actually might be harmful to you because if you dont overwrite on state statute, you have to follow the state statute on allocation or liquidation of LLC and stuff. Since you are sole member/shareholder, you dont have that issue.
Electing S-corp is just one more step after you create an LLC. You need to file a form with IRS. A quick google and few articles can help you. If you time is worth more than googling and reading an article, may be pay for it.
Once you scale up and when cost makes sense, you can always amend your agreement to make it more robust.
Thanks for this-- my father and I bought together even though he doesn't want any of the equity (I put about 80% in) and I will eventually use them to pay him a cash dividend in his retirement. We have yet to figure out exactly how that will work but he's just proud of me that I went from no job to owning 3 strong investment properties. I will run the idea by him
Anyone know about the due on sale clause of transferring property into an LLC vs a Land Trust? My banker told me I could not purchase property with the LLC which is why we put into our own name but ive read you can do the land trust without triggering.
Obviously dont want to trigger DOS but Im also guessing that Fannie only looks into this when the mortgage isn't being paid?
And thoughts on setting up my own S-Corp Management Company?
Rental Property Investor · Durham, NC · Member since 2016 · 7k+ posts · 7k+ votes
8y
@Noah M. I paid an attorney for something similar around 900 bucks and regret it. Just use legal zoom or do it yourself.
You can find much cheaper prices. My cpa will do this for 250 plus whatever the filing fees are.
Vandalia, MI · Member since 2018 · 569 posts · 264 votes
8y
Setting up the LLC should cost 100.00 plus filing fee (Depending on your state and if you wish to use a nearby state instead(yes you can do that)) You also will need a DBA if you don't have one. I am not sure why you want an S- Corp....This will tax you double. And it gets sticky. The thing about putting the property into the LLC by making a trust is a common way people do this. I think it complicates selling the property but if you are in it to hold it for long term then you should be great.
New York, NY · Member since 2017 · 144 posts · 75 votes
8y
@Michele B. I would use the S-Corp to avoid paying SE taxes. Since my business is short-term rentals, we rely more on the cash flows for our return. I dont believe the S- Corp taxes you double. If Im not mistaken that is the C-Corp which does that.
@Caleb Heimsoth Thanks for this - thoughts on triggering Due on Sale?
Investor · Shakopee, MN · Member since 2017 · 102 posts · 60 votes
8y
There are a few thing I would note just to think about while you make your decision ...
- An important step after establishing the LLC is to transfer title to the property to the LLC. I see you're based in NY - I once needed to help a client transfer a NY condo to their revocable living trust and the fee for the deed prep service was something like $800-900 because of NY fees (we were using one of the well-known national deed prep companies that usually charges less than $200 a deed including recording fees). I don't know if that is typical, but it was a shock for the client, and it is definitely significant on top of all the other formation fees. The LLC does nothing if the property isn't transferred into it, so it's a very important step -- make sure you factor it into your costs!
- Corporations have more formalities but a lot of it is just making sure annual minutes of meetings are being prepared. An attorney doesn't need to do this - there are plenty of forms/templates available and generally it's not that it needs to be /perfect/, just that it meets all the criteria. (Accuracy and timeliness are very important for Secretary of State filings - but those will be necessary for just about any business entity.)
- Whether you need just 1 LLC or multiple LLCs really depends on how much protection you need. If you put 3 properties in 1 LLC, then a lawsuit regarding 1 property could put all 3 properties at risk. If you have 3 LLCs for 3 properties (i.e., 1 LLC for each), then a lawsuit regarding 1 property only puts that property at risk. That's the thing about the entity question - the right answer for one person isn't necessarily the best answer for you. But there's some really good reasoning and analysis available on BP as to how people decided what structure to use.
- LLC formation companies can definitely prepare the entity right, but they're not going to know how to give advice on how to structure what you're doing. They're selling a product -- if you go into a hardware store and know you need a new circular, then someone can lead you to it and help you find it. But if you go into a hardware store and just know you need something to cut a piece of wood, the sales person might sell you a table saw or a hack saw -- not because it's the best, but because it's the only two saws that particular sales person has ever used. And you can probably cut your wood with it, but it may not be the best way -- and using the wrong tools can lead to bad results, or at least not the results you're looking for.
@Michele B. I would use the S-Corp to avoid paying SE taxes. Since my business is short-term rentals, we rely more on the cash flows for our return. I dont believe the S- Corp taxes you double. If Im not mistaken that is the C-Corp which does that.
@Caleb Heimsoth Thanks for this - thoughts on triggering Due on Sale?
You would have to pay taxes twice with an S- Corp as you would pay on income to the S-Corp and then you would pay as owner if you take any money out of the S_Corp for you.
New York, NY · Member since 2017 · 144 posts · 75 votes
8y
hey Michele, this article may help explain. The S Corp is a 'pass through' entity where the owners report share of profit and loss on individual tax return
Greenville, SC · Member since 2018 · 45 posts · 17 votes
8y
Once you know which entity you need, it takes 10 minutes to get an EIN online. Then, if an LLC (or similar,) send the corresponding articles of incorporation to the state ($110 in my state.) boom, done
Investor · Honolulu, HI · Member since 2017 · 45 posts · 20 votes
8y
@Noah M.
I’ve gone the cheaper route and the more expensive route, and personally if it was to hold properties I own I would not go the cheaper route ever again! It cost me more time, errors on decisions about member VS manager managed LLC‘s, operating agreement wasnt specific /protective for properties, and even caused difficulty in opening bank accounts. In the end after trying to “save money” I went and got the unlimited entities (and many other benefits) that will save me money if I continue to get additional properties like I plan to over time. And I’m getting new properly written operating agreements drafted for my three ”generic” LLC’s at no extra cost.
You have Airbnb properties—if it were me I’d definitely get those in LLC’s. I have liability Insurance too but these days its not enough.
Rental Property Investor · Beverly Hills, CA · Member since 2017 · 28 posts · 20 votes
8y
Definitely wat to check out https://www.activefilings.com they charge $25 plus state fee's for standard turnaround time, or $125 plus sos state fee's for next day service with a few goodies included like ein # and membership certificates. For $25 plus SOS fee's it was a no brained for me. Hope this helps.
Investor · Alameda, CA · Member since 2016 · 132 posts · 170 votes
8y
@Alex M. - re: Anderson advisors - yep! found another couple firms with similar models, as well. I think those types of firms are good fits if you have a functioning business that's generating profits. they aren't a great fit for fledgling businesses.
Based on how you describe your REI experience and recent activity... sounds like you've got a good thing going and maybe they'd be a good fit
Attorney · Santa Cruz, CA · Member since 2015 · 345 posts · 358 votes
8y
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.
Attorney and CPA · San Diego, CA · Member since 2017 · 590 posts · 422 votes
8y
@Alex M.. We may be biased being this is our profession, but..... we've also seen the complete messes that come from doing these things incorrectly. And the horror stories of people paying way more to fix the situation than just doing it right the first time. Good professional advice is worth the cost. You want someone who knows your full situation and can tailor their advice to you. The LegalZooms of the world are a mill churning out documents without any attention to special situations and the best tax consequences to you or how things should be managed. This is especially important if you are in a state with complex laws like California or New York or if you have partners. Even entities with single owners should be seeking out professional advice. There's that saying... you get what you pay for...
Good luck!
*This post does not create an attorney-client relationship or a CPA-client relationship. Readers are advised to seek professional advice.
New York, NY · Member since 2017 · 144 posts · 75 votes
8y
I was told a Series LLC in TN and S-Corp for the NYC rentals is what I need. This is in line with what I've been reading-- The Series because I plan to keep investing in TN, and the S Corp to avoid SE tax
Leaning towards going with Cheri Hill from Sage International for $1790 for the Series, and $995 for the S Corp. Thanks all.
