When or/IF I should start an LLC?

Question

Hey BP community! I am just starting out learning more and more about real estate at 20 years old accompanied by my bestfriend who is 21. I've been doing a lot of research into getting started with RE and a lot of what I have been seeing is to START with wholesaling but utilize your profits to attain that first asset. Sounds easy on paper. I'm about halfway through my RE license but being a realtor just doesn't really fit what I'm trying to do. I'm ready to begin wholesaling but I am caught between keeping things private or starting an LLC. Does anyone have any kind of advice or maybe personal experience testimonials? Thank you guys :)

Lleyton Verheul · Answer

Hey @Nicholas Sheetz

You and I are in very similar boats. My partner and I are both 19 and are doing wholesaling together until we can raise enough capital to start our property portfolio. As a disclaimer, we have not done a deal yet. We are starting to market for buyers this week as we have been doing all of the preparation steps over the last 2 months.

To answer your question, I think it is completely up to you on starting an LLC. My partner and I did start an LLC and our deals/income will all go into our business. On our purchase agreements and reassignment contracts, we will be signing our names as co-founder or managing partner of our LLC. Our checks from the title company after we close will all be addressed to our LLC. All of this can be done without an LLC but we created one right away for a few reasons. We wanted to have an LLC because it's cool. We will need one in the future to buy our houses under. We want to build a relationship with our bank ASAP for future loans if needed. We want to be 50/50 partners in a way that is formal and in writing.

I do fully trust my partner that no disputes would happen down the road but if he had a deal or property written with his personal name on it, he could technically run off with the profit. Having a joint LLC can hedge against that risk.

Having an LLC will require a few more steps like setting up a business bank account, filing a form 2650 (S-Corp election form for tax purposes), and getting an EIN number. This are manageable steps but still something to consider.

I do recommend getting an LLC and I am happy to help you out with other questions as I am still wrapping up the process. It really is cool and a great motivator when you've got the business certificate framed in your bedroom 😎

Drew Sygit · Answer

@Nicholas Sheetz and @Lleyton Verheul

When partnering with anyone, but especially family & friends, you want everything in writing. Otherwise, you may not be welcome at family events!

Too many investors want to partner with “handshake agreements”, which they would never do with a tenant or property management company.

Things to think about:

1) What happens if one of you is suddenly incapacitated or dies? Do the surviving partners get that investors shares or do they have to deal with relatives that may be ignorant and/or greedy?

2) What happens if one of the partners wants to terminate the business relationship and wants their investment out now?

3) What happens if one of you drinks & drives, killing someone and getting sued by the victim's family? How would the other partner(s) be protected from that?

So, why wouldn't you want to hire an attorney to create a partnership agreement and perhaps an LLC to cover as much of the above as possible?

Dom Battezzato · Answer

Hey Nicholas,

I recommend getting an LLC sooner than later. As soon as you start dealing with people and contracts. Great work getting into real estate!

Andre Thomas · Answer

I think you should go with LLC very soon. It'll protect you from people getting into your personal funds and assets if they want to sue you. I also think you should continue to get your RE license. It just cuts out one more person you have to pay when you do deals. You'll also get access to home information easier than average joes like me.

Ray Hage · Answer

You should absolutely have a LLC for each and every part of your RE business. If you will wholesale, thats LLC #1. If you buy a property to hold, that's LLC #2. If you end up doing property management for a client, that's LLC #3. Keep everything separate and in good order to protect yourself from unnecessary legal risks. You should get an EIN number for each LLC from irs.gov site and open a separate bank account for each one.

When or/IF I should start an LLC?

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