When to form LLC., before or after buying a property?

Question

When to form LLC , before or after buying property?

Can I borrow money from the bank for LLC or other form of corporation?

When is the perfect  time to form LLC, is it when you are beginner investor or advanced one?

Which is the  best business  structure for beginner investor like me ?

Marcus Auerbach · Answer

Account Closed I don't think we disagree, please read what I said; your personal actions can always get you sued, plus if you make mistakes running your LLC i.e. comingle funds it's relativley easy to make the case for a good lawyer and make you personally liable. I think that is what you have meant. Good lawyers cost good money and this is not your every day smal claims court type lawyer hired by a tenant for $150 an hour.

You can probably find out the assets I own personally, because I have not put much effort into hiding anything (heck, I talk about it on BP!), but as one's net worth grows it's a consideration for many to seek the help of an asset protection specialist and set up trusts as holders of the LLCs in states like Nevada and Delaware etc.. My point is - you need to have some substantical assets before it is even worth thinking about this. For most people who are contemplating if they need an LLC or not IMO the asset protection side of it is less imporant than showing professionalism - there is just simply not enough money to make it worth while to go after them.

Bob Okenwa · Answer

@Maggie G.

The safest advice I can give is to speak with a CPA and attorney before making that decision. They are paid professionals who study and deal with these kinds of things all day long. With that being said, it depends on what you plan to do. The advice I was given and will work for me may not work for you. My business partners and I plan to flip houses and spoke with a CPA not that long ago and was advised to use an LLC.

In most cases, a lender will not lend directly to a newly formed LLC. They usually want to see a year or more in business and possibly even tax returns of the LLC. When loaning to an LLC, you'll either have to buy in cash or get a commercial and that comes with different rules and down payment requirements than Fannie Mae loans.

Business loans vary by bank and you'll need to contact some local banks, credit unions, and your personal bank as well to see how they structure business loans. They may want to see the business has been operating for a while.

If you plan on getting rental units, I've seen other advise just getting an umbrella insurance policy to get started. But if you plan to flip, an LLC may be best. Attorneys and CPA's will always give the better advice so hopefully this gives you a better idea.

Bob Okenwa · Answer

@Maggie G.

The cost to form an LLC in Illinois is $500 for the filing fee and $250 annually along with your annual report.

http://www.cyberdriveillinois.com/publications/business_services/llc.html

David Dachtera · Answer

@Maggie G.

You've got a lot of good info so far. Here's what the others may or may not know ...

First, if you're counting dollars, you're not ready for REI. The consumer says, "How much money will (x) cost?" The entrepreneur says, "How much money will (x) make?" Acquire the entrepreneurial mindset first.

Second, REI is a business, not a hobby. You can't run a business you've never built. Run it like a hobby, it will pay you like a hobby. Run it like a business and it will pay you like a business.

Third, when holding property in your own name, if your insurance has to pay out, it means litigation was brought and you lost. Your ENTIRE ESTATE is now exposed and at risk.

Fourth, your business entity structure - LLC alone provides little or no protection - provides more benefits than just asset protection and estate planning. Businesses provide tax benefits beyond what most folks understand.

Fifth, as Bob Okenwa indicated, banks expect businesses to have been around for a while before they will even consider lending to them. Hence, the whole discussion around private lending. You'll want a good two years of history for your business entities. So, START THAT CLOCK! You'll need to have your LLC around for a while during which time you're establishing credit for it, THEN you can approach lenders about money for deals. There are steps you'll need to take to build the business to a point where you can expect to get ANY money for it without a personal guarantee.

THAT is how you benefit by opening an LLC: this is a marathon, not a sprint.

Marcus Auerbach · Answer

@Maggie G. you can get a personal umbrella insurance for very little money from the same company that insures your house and car. What it does is to cover you against all risks (car, house etc) you are insured against otherwise already, but it kicks in after you have exceeded your limit on your regular policy. Let's say you have a car accident and you cause damage worth 400k because you rear end a Ferraris push him under the Lambo in front of him and manage to destroy both. Your car insurance limit is 250k and maxed out, then the umbrella will cover the rest. Same if a tenant slips on your driveway and breaks his hip and is lifelong in a wheelchair. You can also get a commercial umbrella for your properties and in the name of your LLC. But sure to have your insurance agent explain the policy to you.

Marcus Auerbach · Answer

@Maggie G. most people start an LLC for two reasons: asset protection and marketing.

Marketing: operating as an LLC makes you look more professional to the outside world, regardless of renting or flipping. In a very simpified way banks don't like to lend to an LLC, because it limits your liability to what's in the LLC - and they really want more liability than an empty LLC without much assets or history. But who says you have to borrow with your LLC? You can set up an LLC and still borrow in your own name. It still makes you look professional to the outside. Plus later on it's a good thing to have an LLC that's already matured.

As far as asset protection LLC's are sometimes overrated by new investors. You first need to have assets worth protecting. If you have a few thousand dollars in equity it is hardly worth the effort. The LLC does not protect you, it just limits the exposure that you have.

Now if you buy your (second!) million dollar asset with 250k down you probably want to put that into an LLC. The reason I say second is that the equity within an LLC is not protected from creditors going after that particular LLC, but they can't go after your other ( your first) LLC or your personal assets. Its a way to ensure that when you get sued and are being found guilty and liable only the assets within that LLC are at risk (but make no mistake you are still personally liable for your personal actions).

However, even with an LLC structure, your first line of defense should always be a commercial umbrella insurance. It should take the first blow and only if that fails your assets are at risk. At that point you want to limit the damage to what's within that LLC and not everything you own. This is my most investors seem to choose to set up additional LLCs later as they grow, so they create firewalls between their assets: if one burns down they don't loose the other ones.

PS: this reflects my personal findings - I am not a lawyer and not your advisor.

Patrice Boenzi · Answer

@Maggie G. Hello! I am a Realtor and Investor. I am working with an investor and I know banks will not lend to an LLC. I love helping people get started and if you ever want to chat, I would be open for that; not looking for business just genuinely like to connect with other investors. PM if you want

Maggie G. · Answer

Scott,

what would be a best entity for new investor  like me?

what is the cost of LLC?

what are other options for me?

when is the time to set up LLC for newbie?

Thanks.

Scott Smith · Answer

@Maggie G. Before.  I work extensively with these kinds of questions with my client, 100% of which are real estate investors (all stages) looking to protect their assets.  I'm happy to help any way I can.

Maggie G. · Answer

David Lachtera, thank you so much for your feedback. Yes, you are correct, I am counting every dollar  because I am relatively  new to this game .  I wish it was my business  but it is hard if you have a full time job.............It takes a lot to  quit the day job and run REI as a business.

Can anybody tell me  what is the cost of LLC ?

Thank you!!  Great  advices!!!

When to form LLC., before or after buying a property?

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