When should I open an LLC?

Question

At what point is it wise to open up an LLC for a real estate business? Curious to know when I should open up my own.

Saravanan Saravanan · Answer

@Samantha Prince Just like any field of work; initially things might look easy or overwhelming at the start.

Once you understand the steps involved, it would become second nature.

Understand the rules of the LLC in your state, along with requirements on accounting, taxes, insurance, and legal perspective.  Then implement on one property.  This way Learning and doing it right from the beginning would be wise and you would get better with it on a second property.Good luck with your success.

David M. · Answer

@Samantha Prince

As always, it depends...

What sort of investing are you doing?  Landlording?  Then, maybe never create a LLC.  Flipping?  Probably sooner than later..

Remember, the LLC only provides asset protection in the form of limited liability protection (unless you are investnig with non-spousal partners, then its a bit different).  However, for that additional legal protection, there are associated costs/overhead, and I believe it varies by State (since the entity is formed by State).  So, you'd have to consult a qualified professional or two.

For example, in NJ you need to get Worker's Comp insurance.  Every small business owner has told me the State will catchup to you and the fines are enormous, and they should have just paid for the insurance up front.  Meanwhile, business insurances charge you an annual premium AND a percentage of your profits and what you subcontract (if your subs don't have insurance).  When you have a LLC, you can't co-mingle your funds and you have to keep "better" accounting both for tax filing and in case you are audited.  Legal entities are not eligible for conforming residential loans so you'll have to use commercial financing which is more expensive and poor terms (don't listen to those who tell you to "frankenstein" your deals by taking the loan personally and quit claim deeding the Title over).  You need to keep your ownership clean as well to not co-mingle or use the LLC as an alter-ego.

I will say this... You asked about a "real estate business."  If you are running a "formal business," then you probably should create something upfront and early.  If you are "investing," you may never need to form an entity.  There are many dicussion threads on this on BP.  There are some investors who own up 50+ single family homes personally.  You just use landlord insurance, umbrella policy, and keep your properties in good repair/condition.

I hope this helps.  Good luck.

Timothy Moore · Answer

I'd recommend doing it from the start. If you're not doing real estate as a hobby and actually investing, you're also taking on some liability and need to treat it as a business. Separate accounts, tracking, EIN, etc.

In Michigan, it's very simple to set up an LLC and Quit Claim Deed the property to it. Then make sure everything operates through the business such a leases, banking, management, etc.

Mitchell Zoll · Answer

When you have truly decided to operate a business.

Too many investors search out an LLC "to protect their assets" without understanding what is necessary run the business and maintain corporate formalities. Folks set up an LLC from an online company, sign a few contracts under the LLC name, but then fail to draft contracts that they understand or set up business practices they will actually follow. Within a year the contracts are a mess, the records haven't been maintained, and the state has terminated the entity for failing to file the most basic forms.

Insurance is a great vehicle to protect assets if that is a concern and there is no reason why you can't own real estate in your personal name.

But you'll know its time to set up an LLC when you are ready to do all of the things that are actually involved in running a business.