All Forum Posts by: Joshua Schneiderman

Hi Julia - saw this question wasn't answered so thought I'd answer it. No - you don't need an LLC to start wholesaling. You'll see several posts on BP about the benefits of an LLC (or any other type of legal entity) and differing views of when it makes sense to form one (some say it doesn't make financial sense until you generate enough revenue to justify the additional costs associated with an entity). I personally am of the view that the liability protection you get from having a legal entity is well worth the cost in pretty much every situation. In any event though, purely from a technical perspective (and not risk management perspective), you do not need an LLC to start wholesaling.

While I agree that insurance gets you a lot of the asset protection benefit that an LLC provides, I still believe the LLC is well worth the fairly low cost and additional administrative complexity. It's additional protection against being underinsured and is "backup" in the event you face a claim that is not covered by your insurance. @Wade Sikkink is right on though with his comment about properly maintaining the LLC. If you don't do that, you'll be stuck with the cost of the LLC and jeopardize all of the benefit.

Welcome Jose - you'll find a ton of useful resources here.

For those who don't religiously follow developments at the SEC (I know, I should have better things to do with my time), this Friday the SEC is scheduled to vote on its final crowdfunding rules.  There have been several discussions on the forums of the existing crowdfunding rules (i.e. Reg. A+ and general solicitation when it comes to raising funds from accredited investors), but Friday's vote relates to true crowdfunding - - raising small amounts of money from non-accredited equity investors.  Fingers crossed the SEC doesn't go overboard on hurdles with its rules - this could really open up a new avenue for financing real estate deals.

All of your comments relate to raising money through debt. Alternatively, you can look at equity. For example, form an LLC and capitalize it with investor money in exchange for some percentage of the ownership. You receive the remaining ownership in light of your services provided to structure and manage the deal. Maybe the investors get their money back out before the profits are split after that (aka a "preferred return"). You'll need to work with an attorney and CPA to do this as there are tax complexities and securities laws that must be complied with.

I agree with @Gino Barbaro - form an entity and get insurance. The cost is well worth it. What if you do repairs and something goes wrong and you are sued? Ideally it would be covered by an insurance policy but if your limits aren't adequate or for whatever reason the liability falls outside of the policy, your personal assets are at stake. In most states it only costs a few hundred dollars a year to maintain an LLC and so long as you respect it as a being separate and apart from yourself, you should be able to shield your personal assets from any exposure and sleep better at night.

If you go with an S Corp, make sure you research the restrictions that are inherent in having S Corps.  If you do something that violates those restrictions, you will have blown your S Corp status and by default become a C Corp, which is likely not what you want to be.  If you are going to be the only owner of the business then it's unlikely you'll trip some of the S Corp requirements (as many of them relate to who can be a shareholder and limitations on having multiple classes of securities) but make sure you understand them generally and confirm the restrictions fit within your business plan.  A CPA or a lawyer can explain this to you in more detail and help you figure out what's right for you.

Welcome Jessica!

Welcome Esther!

Originally posted by @Joe Fairless:

@Joshua Schneidermanwelcome to BP. What's a common misconception you see your clients make as it relates to structuring legal entities? 

Hi @Joe Fairless - two of the biggest mistakes/problems I see are (1) not recognizing that when you bring in investors and give them a percentage of an LLC that is actually a "security" and there are laws that need to be complied with in issuing the security, and (2) not addressing capital call provisions (or other financing options) in the event the venture runs short of capital after the initial round of investment. On #2, if there are mandatory capital calls and one party defaults, what are the remedies of the default - i.e. is there dilution? At what rate? Can the other parties make a loan to the Company to cover the default? What are the terms of the loan?