Four rookies wondering to LLC or not to LLC

[Xavier Karikitan]

I'm one of four rookies who decided to pool our resources together and get into Real Estate Investing. We're a group of friends who trust each other and want to keep our friendship and business relationships intact. We're wondering if forming an LLC right off the bat is a good idea. We have some idea as to what the pitfalls are to not having one; but are also curious to what the advantages are.

Are there any groups out there that started in a similar fashion?

Any input is appreciated. 

[David M.]

@Xavier Karikitan

https://www.biggerpockets.com/...

Let me get you started with the post above. That should give you a good primer on LLC's. In your case, you have the best/main reason to form a LLC as you are investing with non-spousal partners.

In your case, its necessary since you need, or should have, to have "all" your options/contigencies figured out in advance. Usually, a lawyer can help you with that when drafting your Operating Agreement. This avoids messy arguments and complications down the road. Also, LLC entity will also be able to formally apportion your tax liability. For example, are you guys doing a 4 way split? Some other split? Will it be variable?

These are the main issues. Otherwise, investing with a legal entity does not provide any additional tax benefits. for "regular" residential investments, the maintaining the limited liability aspects can actually confound and/or make it prohibitively expensive for a single investor to do. For example, legal entities such as a LLC are not eligible for conforming residential loans. You have to use commercial financing.

All this being said, it does depend slightly on what sort of investing you are looking at doing. You might want to try one deal with out it to see how you guys like it, will it work out, etc. Or, form a LLC but don't go crazy (don't spend too much setting it up) to find that you guys won't stick with it.

Again, its depends on what you are doing. You might find that a nested set of LLC's is to your advantage or liking. For example, each of you creates their own single member LLC. Then, you form a a multi-member LLC using your single member LLC's as the owner. Allows for each of you to maintain your own branding/marketing since you have a static LLC. The multi-member LLC could be formed for each deal. This can be advantageous as maybe for a deal only 3 of you want or are ready to go in on it. Maybe you want a different split or a different set of business conditions. This can all be taken care of cleanly in your Operating Agreement. Sure, it can be done with a "regular" LLC formerly described, but you'd have to update/amend your Operating Agreement. Its just different ways of doing the same thing. Also, each of you LLC's would have its own bank account giving you one more separation between your own accounts and the investment.

I hope this helps get you started.  Good luck.