When to start an LLC?

Question

Now that I am starting to gather momentum in investing as well as my professional career, I feel as though I am getting close to the point where I am going to have to start thinking about a LLC or something similar.  We file our taxes in New York.

Here is my scenario:

-I have a w2 job which as of right now is my main source of income. (NY)

-I am a new real estate agent with a few deals working. (NY)

-My future wife has a w2 job and will be an agent within the next few weeks. (NY)

-We are one year into a live-in flip (NY)

-We have a long distance buy and hold duplex in Florida (FL)

-We are in contract for a buy and hold duplex in Ohio (OH)

-We plan to build a portfolio of small multi-family in OH within the next year and refi all OH to a blanket. (OH)

My future wife and I own everything 50-50, what are your suggestions?

Zeke Liston · Answer

Hi Ryan, I would talk with your tax accountant and lawyer, I have recommendations for both here in Columbus, OH if needed. I personally have an LLC set up for my properties and an S-Corp set up for my brokerage commissions. If you don't currently have an S-Corp set up for your commissions, I would talk with your accountant about setting one up. ***Please note this is not legal advice.

Suzanne Player · Answer

You are at the point where you definitely need a corporate attorney to advise you on how to structure things going forward.  With a property in contract, I would suggest you make this a priority.  I don’t know if you are using an attorney in Ohio for your purchase, and if so, whether that attorney also does corporate work, but regardless, you need to have at least 1 attorney on your team.

You should have landlord tenant counsel review and approve all your leases for your tenants (even if you have a form lease you believe is safe to use).

You also should have a CPA working with you for tax planning and other considerations.

While there are costs to hiring these professionals, there are bigger costs to not hiring them.  It looks like you are making great progress at accumulating a portfolio at a very young age, don’t set yourself up for problems by moving ahead without counsel (especially if you pay taxes or do any business like a flip in New York).

William Merone · Answer

@Ryan Cleary I agree with your thoughts, it is time to setup a separate entity for all of your investments.  @Suzanne Player makes a good point by bringing a CPA as well as an Attorney on to your team if you have not done so already.  It seems like you're doing really well though nice job, keep it up!

Basit Siddiqi · Answer

@Ryan ClearyCreating an LLC or not is normally one you should have with an attorney and will be based on a couple of factors1) Your risk exposure2) Your risk appetite3) Your net worthThe amount of owners in the real estate deal also is a factor. If something goes wrong, you are potentially putting your assets along with your partner's assets at risk. Again something to discuss with an attorney.Good luck!

Alexander Szikla · Answer

@Ryan Cleary The big benefit behind an LLC is shielding yourself from legal liability. Basically, creating a separation (legally a distinct entity) buffering your assets. It is a very cheap form of insurance!

1. As an agent, you want to protect yourself from disgruntled clients. DE likely provides you with Errors and Omissions (E&O) insurance which should be sufficient frankly. But you can set up an LLC if you want to be super careful.

2. I wouldn't put your live in flip into an LLC. You want that to be your personal residence for 2 years of the last 5 years when you sell. Since you are married, that will provide you with a $500,000 capital gains tax exemption!

3. I would put each investment property in its own LLC unless they aren't worth very much. If these are $30k a piece maybe you want to bunch a few together. But if they are worth $100k or more each, I'd segregate. You want to make sure any potential liability stays insulted to the property "in question" and not spread putting everything else at risk. Very important that you should not commingle personal and business expenses nor cross expenses through various LLCs. Keep everything separate in order to maintain the integrity and legal protections afforded by an LLC. I would also suggest starting a Management Co. LLC to separate a bit further and also provide the convenience of running all financials through one entity as a manager which is okay.

When to start an LLC?

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