LLC Formed, what next?

[Lewis C.]

Hello all,

Looking for some help for the BP folks....

My business partner and I currently own 4 rental properties, which we plan to put into an LLC. The LLC has been filed with the State of TN, and once it has been recorded, we will QC the properties to it. (our lender has approved this). We are 50/50 partners in the LLC and will split profits / losses accordingly.

My question is: How do we protect our personal assets, and the equity in the rental properties, in the event a Tenant sues us etc.?

I have been unable to get a personal umbrella policy to cover the rental properties to this point, because we are both named on the Titles of the properties.

Is there some kind of business insurance that would be suitable for this situation?

Any insight from those that may have an opinion or experience with a similar situation would be much appreciated.

Thanks!

[Bill Gulley]

I know folks are tired of hearing me, I am an accountant, among other things, beyond that and I'm not an attorney,  you can check my profile as to general experience.  

Do not use multiple LLCs, one for each property, I have never heard any of our member attorneys suggest or endorse that strategy. As mentioned, it's a PITA to manage, you mess up and veil is pierced.

Next, you must capitalize each LLC, no LLC will stand with $100 bucks in the bank under its name with a $10 or 100,000 asset. Do you have, say $40K to divide among 4 LLCs?

So far, the business knowledge is zip, as you don't know what to do next, that's okay, just saying you're probably not up on the required admin functions of your LLC with unrelated partners....multiply those duties by 4!

Get insurance after you deed the property to your LLC.

Now, with all that set aside;

File the LLC, it should be "filed" upon receipt and acceptance of your Sec. of State unless they have some notice to confirm filing.

Next, did you have an Operating Agreement made? Your LLC isn't functional until that is adopted, should have been done together with filing process.

In the Operating Agreement, identify who has signature authority for binding the company, ability to incur debt in the company name, what limitations they may have, when it becomes necessary for both partners/members to sign or execute documents. In accounting or finance, this is a "cut off amount" neither partner should be able to clean out a bank account, people die and the rights of others may become effective as to the rights of the dead guy, other things can happen as well, so give these cut offs careful consideration, but make it so that you don't need two signatures to go buy a mop and bucket either.

Other issues need to be addressed in the OA as well, but ask your attorney, this is a forum post, not a book.

Next, you need to apply for an EIN tax number with the IRS and you state should be using the same, but check.

Business licenses, municipal, county as applicable, they may want your EIN. Any sales tax applicable to the business? If you sell stuff as part of your operation, you'll need your tax account.

After you have your tax number, set up bank accounts. Understand the initial deposit requirement and treatment for an escrow account, it shouldn't be any of your money. That one account can take care of 100 property deposits or whatever under one company name. If you are allowed to earn interest on any escrow account, check state laws as to who is entitled to that, usually the principal who's funds are held, but, you may be able to agree that interest will be paid to you for the maintenance and expenses of the escrow account, id so, that needs to be addressed in your deposit agreements.

I think, IMO, $1,500 is sufficient for the first rental as to an operating account, then 1,000 for the second, then 500 for each additional SFD property, minimum as an initial deposit, more is better. You can have a money market account as your operating account. Ask your attorney what capital requirements might be deemed appropriate as this will be on a case by case and as a local assessment.  

If you hold funds of others, like deposits, that is an "Escrow Account" you need to be familiar with state law on the accounting, deposits and withdrawals, understand what "comingling funds" is!

You need an "Operating Account" this is the bank account used to run the operations of the company. You can not comingle funds of your personal needs or monies with this account either or your veil will be shredded not just pierced. (Now, think about running 8 accounts for 4 properties! An accountants dream, not yours, especially when you pay them.

If you have sales taxes, you may need a tax account. (Most RE types don't, but I've had operations where tenants went to classes, bought books, those in maintenance classes bought supplies, etc. so sales taxes can be applicable)

After you have deposited your initial contributions to the company, you can begin buying stuff in the company name and use the business account.

Do not use company money to pay for personal use items, I don't like buying gas with a company account unless the vehicle is in the company name. Write yourself a check to your drawing account (how you get paid) and then buy gas, as for taxes, you can use business expense deductions to wash out income to you by accounting methods. See your accountant.

Deed the properties over to the company.

Get insurance in your company name.

Contact your title insurance company and have the title policy changed to insure the company. It's not your personal property any longer. Now, title coverage can flow through, but it's much less hassle doing it right especially if you have a claim.

Flip the owner's utility accounts to the company name, a landlord utility account can keep utilities turned on in the event a tenant fails to pay and avoid shutoff turn on fees.

Now you can advertise in the company name. Use the exact name of the company in all ads and written materials.

When you sign, you will be signing for the company, never simply sign your name without a signature block as an official capacity or representative of the company.

Now you can get business cards, stationary, office supplies, etc. Keep all receipts and see your accountant. Receipts under $100 can generally be recorded and copied electronically or physically (in a file), I kept them for 3 years, over $100, I kept for 7 years. Over a thousand, I kept 10 years, two reasons, one as an audit trail for taxes, secondly to prove transactions as to claims or guarantees. Paying laborers I keep for 7 years, primarily as to liability matters from poor work and taxes. 

Understand what constitutes a major purchase, all real estate transactions must be authorized in compliance with your OA. For title work, you will need proof of your authority to execute deeds, that should also be done as a part of your records or in the Minutes as needed  as well as major expenditures with partnerships in the OA. Ask you attorney about proper administration.

Anything you sign in the company name prior to proper filing of the company you will have personal responsibility for, but may have that business conducted under the company, best practice, don't sign anything until you are properly filed. 

See your accountant and see your attorney, see your banker and insurance agent too.

 Do not take legal advice off the internet, unless the advice comes from an attorney AND they are in fact advising you specifically! Generally, that won't happen with an attorney.

I understand everyone wants to form their company on the cheap, you can accomplish some things, I'd say most OAs that are canned boilerplate are probably trash, you should consider your other assets, your estate, Will, Powers of Attorneys, matters with heirs to build a sound, orchestrated machine to run your personal side along with your business interests, I bet less than 10% here have a fine tuned orchestrated and operational contingencies. DIYers will never get there, without assistance, IMO.

The best way to protect yourself personally is 1. Good property and company management, 2. Insurance, 3. Knowledge, 4. Company structure, 5. Personal estate planning.

Good luck! :)