Setting up California LLC for RE Investing - Anything special?

Question

Hello everyone,I am finally ready to invest in a rental property and my goal is to get one property by the end of the year.

Anyways, I need to setup a California LLC (I have a business and assets I want to protect) and am wondering is there anything “special” / different I need to do when setting it up for real estate investing….

I just want to make sure I don’t make any mistakes with the setup…I have 2 LLCs now, but both are for e-commerce.

Thank you!

Basit Siddiqi · Answer

Question, why are you asking legal questions to your CPA when they should be directed towards a CPA?LLC's are around and many people create them(individuals and large companies) on an annual basis, They can't all be creating them with no benefit in mind.

Account Closed · Answer

As mentioned several times, I started 5 LLC's last year and cancelled them a few days later. My CPA offered to form the LLC's for $850 per LLC. That comes out to $4,250 plus he charges me about $300 to set up the IRS Tax ID for each LLC making is charges $5750. Then, he charges me separately for the accounting for each LLC and then I would have to pay the annual $800 Franchise Tax Board fee for each LLC.

I formed the 5 LLC's online and I think the cost was only $35 or $75 per LLC (can't remember). Each application had something like only 5 questions and took less than one minute to complete. That was a long way off from the $850 per LLC.

Account Closed · Answer

Sorry! I don't understand your question: "Question, why are you asking legal questions to your CPA when they should be directed towards a CPA?"

I am definitely not an expert when it comes to all the pros and cons regarding S-Corporations, C-Corporations and LLC's. Especially, since the rules are different in many states.

What I am an expert in is the bulls..t being sold that screws up people's lives.

As everyone knows, LLC stands for Limited Liability Corporation and every person I ever met who tried to sell me on the facts that LLC's are great, for any purpose, never told the entire truth because for the Average Joe an LLC does not limit his liability and an LLC does not stop creditors from going after assets outside the LLC. LLC's also come with some confusing and complicated operating and tax rules.

You call them Limited Liability Corporations and here are four reasons why LLC's do not limit members' liability and why LLC's are not bulletproof. Before starting an LLC, or before doing anything in business people need to look for 'The Devil In The Details", or everything the Master Salesman, for some strange reason, just forgot to tell them.

1. An LLC does not protect members from court judgements. If an LLC member gets any type of court judgement against him then the creditor who won the judgements gets a Charging Order to collect on that judgement. Suppose the member who owes the debt is a member in five LLC's. The creditor can get a Charging Order for the debtors assets in all five LLC's

2. In a court proceeding, a judge can rule that your LLC structure doesn’t protect your personal assets. The action is called “piercing the corporate veil”. If you don’t separate business transactions from your personal personal transactions, or if you’ve been shown to have run the business fraudulently in ways that resulted in losses for others. You can bet your buns that Average Joe made some major mistakes and an attorney will find those mistakes within minutes. There goes all his LLC protections in a heartbeat that he thought were so bulletproof.

3. Almost every supplier, vendor and lender who has any business savvy will not give credit solely to an LLC without requesting a Personal Guarantee, meaning if the LLC does not pay their bills then the LLC member(s) who signed the Personal Guarantee are liable, meaning if the LLC doesn't pay their bills those members' personal homes, bank accounts, etc. are at the exact same risk as people who don't have an LLC.

4. In California, a creditor can actually foreclose on an LLC member's interest the same as homes are sold at auctions.

You asked why so many companies start LLC's. I think it is because there are many dishonest people who don't want to make personal commitments to pay their bills and they are more than willing to give their creditors the shaft with no conscience. You tell me why a person starting a business would want to shield their self from having to pay their debts.

Most new and small investors don't need any type of corporation. All they need is to file for a Fictitious Business Statement for a DBA (Doing Business As) and then they can open a bank account under that name and get an IRS tax ID. This eliminates all the annual LLC costs, the cumbersome work and worries about operating within the LLC rules and tax laws and a DBA saves thousands and thousands of dollars over a 5, 10, 20 and 30-year period.

Don't let your ego get you! An LLC has no great effect that makes your business appear to be an international conglomerate. I run several businesses and have S-Corporations, C-Corporations and DBA's. A few years ago, I purchased 5 homes in Las Vegas for my son. I don't want to give away my identity, but for an example, we named his company 'XXX Real Estate'. We recently sold his 5 homes in Las Vegas and purchased 11 units in Hawthorne California and we still use the same DBA name. No LLC because he does not need to waste the annual $800 Franchise Tax fee. In 10 years that is $8,000, 20 years $16,000 and 30 years $24,000. While $800 does not seem like a lot of money, I can think of a lot of ways I could spend $800 rather than having to pay the $800 and that is why so many people on this planet make tons of money, but they are still broke, or could have done so much better.

Account Closed · Answer

I may be 100% wrong. I set up 5 LLC's last year and cancelled, dissolved, or whatever you call it only a few days later. I've been discussing LLC's with my CPA's for more than 50 years and they always told me to stay away from LLC's. My CPA totally agrees with the information I am writing about LLC's and nobody has challenged what I write.

You said you want to set up an LLC because you already have assets, but an LLC in a high percent of cases does not protect your assets you own in other LLC's. Attorneys will go after your personal assets in your other LLC's. It is difficult for attorneys to get money directly from the LLC's, but not from your assets inside those LLC's and I imagine the bulk, or all of the assets in your LLC's belong to you.

Suppose, you have LLC's for your real estate and online marketing. You have a property with a $2million insurance policy. A few of your tenants burn to death and you get sued for $50 million.

The LLC for the property is supposed to make it so most money the Plaintiffs get from you is the assets in that one LLC, but since the court says your damages are $50 million then the attorneys can easily get your personal assets in your other LLC's and assets not in LLC's.

The next major problem with LLC's for real estate is; when a property is owned by you and does not belong to an LLC, then you qualify to transfer or gift properties to relatives and avoid paying capital gains taxes at the time of the transfer. When properties are in an LLC those properties don't belong to you and you don't get the same tax benefits.

If I were in your shoes I would not have one LLC. I use C Corporations and S Corporations and get umbrella insurance. Or, until you have a real estate empire then just file a Ficticious Business Statement and use a DBA and you can still get separate tax ID numbers from the IRS for each DBA.

I am cheap and before making every business decision I often think about everything for several months, or even several years. Then, I stretch the costs and profits over 10, 20 and 30 years.

Vince Rodriguez · Answer

LLC stands for limited liability company not corporation. do not setup a s corp for rentals, you might get hit with self employment tax. also C corp is not for rentals lol. tax designation for LLC for rentals is either disregarded or Partnership. please dont take advice of people on forums on legal matters. CA now offers the 1st year for free for LLCs. You dont really need LLCs to buy your first property. you have to buy them in your name anyway if you wanna use fannie freddie loans. you can move them later.

I have 25 units and bought all of them with my name, but I do have a few LLCs now i use. I  move my properties into it after the loans and refinances are done.

Basit Siddiqi · Answer

@Irwin DominguezNothing special and should be similar to the other LLC's that you have set up in California.As you are likely aware, the LLC will cost you $800 filing fee on an annual basis plus the filing of a CA tax return(Form 568)

Vince Rodriguez · Answer

no, you do not need LLCs to start buying rentals. Its an excuse people use to not get started. If one makes $40k a year and is worth zero dollars. what is this person trying to protect?

David M. · Answer

@Yishma’El ShYahlom

Not necessarily.  You don't really have to have a LLC to invest.  A common piece of advice is to start with your personal name and see if you like it, for one, and if you can make money.  No point in setting up everything to find out that you hate the investment.  But, as with all things, it depends.  Good luck.

David M. · Answer

@Irwin Dominguez

There really should be no difference, but you should consult a professional, e.g. a qualified attorney or two.  Just to touch ona  few things:  As mentioned, there is the CA annual filing fee..  LLC's provide no tax/accounting benefit unless you are investing with a non-spousal partner.  Since you already have 2 LLC's, I guess much of this isn't new to you.  Just be sure to operate them properly so as not to pierce your corporate veil.  I think the issues brought up earlier in this discussion is many people don't operate their LLC cleanly/properly and when they lose the lawsuit they find that they limited liability protection they sought via the LLC is actually not there.  There are lots of facts and circumstances that go into all of this and its State specific.  So, be sure to get good, qualified counsel.

Many investors on BP don't use a legal entity to invest. You just keep your properties well kept and use insurance (which you need anyway with a LLC).  Just remember that LLC's are not eligible for conforming residential loans so you will have to use commercial financing.  So, I understand you have business and personal assets to protect, but just realize the additional cost required to operate with a LLC for REI.

Good luck.

Yishma’El ShYahlom · Answer

Would you recommend establishing your investment company first before buying any properties. That’s where I’m at currently and need help navigating.