OK, here’s some of my thoughts. Some here will agree; others will disagree. I want you to know I was in your exact situation about a year and a half ago. I knew I wanted to operate under an LLC for rentals, but I didn’t really know squat about how to do any of it. I tried finding books in stores and local libraries. Most REI type books only briefly mentioned this in passing & none of them actually gave instructions on how to OPERATE the LLC. My entering argument into this whole thing was that I was also going to have separate LLCs for EACH property to protect one from another if a tenant at one decided to sue. Boy, how my plans changed. If you read the Legal Forum here (especially BLL’s posts - he and mcwagner have been extraordinarily helpful w/ things and Mark will be doing my taxes now), you’ll find things probably aren’t quite the way you’re envisioning LLCs. That being said, operating one LLC for each property (if your goal is to by several dozen over the years) will turn into a nightmare w/ state fees for the set-up and annual fees of EACH one, all the associated paperwork, separate bank accounts, etc.
Filing the required paperwork (Articles of Organization) with the Secretary of State office is a piece of cake and you should not pay anyone ANYTHING to do this for you. If a person can’t fill out a simple state form, they shouldn’t be in business anyway. The “meat” of your LLC protection will reside mostly in your Operating Agreement as well as having a good amount of liability coverage on your properties (it’s really not much more expensive to bump the limit up to $1 million from what they’re quoting you) and operating your business as a business.
What else should you do besides filing the Articles of Organization? You should get an EIN number for the business. Think of this as the business’ Social Security number. It’s what allows you to set up a business bank acct. Speaking of that, set one up for your business. Keep your personal funds separate from the business funds. Don’t EVER EVER EVER pay for something personal out of your business acct. or vice versa. This is known as commingling and is probably the quickest way to pierce the LLC corporate veil and go directly after your assets. Also, set up your Operating Agreement. This is a document internal to your business. The state will not require you to have this, but view this as one layer of your protection if things ever go south w/ a lawsuit. It would be a good idea to have a lawyer draft or at least review it to help make it more robust. The state may not require you to have one, but if you apply for a loan from a bank, they’ll want to see this. If you don’t have one, well…maybe they won’t even want to work with you.
Remember there is probably a link on your SOS website where you can search for current businesses in the state that are in good standing. You won’t be able to use the same name or maybe anything even close to names of businesses currently operating. If you’re going to use one LLC for several properties (search on here for the pros/cons of this for paperwork hassle, asset protection, etc), don’t use an address as a name or anything like that. I would suggest not to include your name either. Try to keep some type of anonymity about this. Many advantages to having your tenants think you’re the “property manager.” Guess what, you’re still that if you manage it yourself. You just have other roles as well that frankly they just don’t need to know about.
Remember to always use your business name, LLC when conducting business. Have it on your receipts from businesses, loan/title paperwork, etc. If your business needs money for acquisitions, loan it to the business from your personal funds using a promissory note to the business. Charge a reasonable rate of interest. These steps help make the transactions “arms length” and will help protect you from the commingling funds argument. If you are ever sued and you’ve just been depositing/withdrawing money like it was your personal acct., the court may rule the business is simply an extension of yourself and all your LLC protection just went away.
Your rates & terms w/ banks, insurance co’s, etc. may be slightly different than if you bought in your personal name. Some places won’t even deal with you because you have an LLC. My favorite financial institution in the world - USAA - won’t deal at all w/ corporations. I hate this, but it just means I have to search elsewhere for financing and insurance for our units. You’re entering a new realm beyond standard home-ownership. Don’t expect people to be lining up to loan you money if you don’t have something to contribute to the deal. Don’t expect you’ll get financing for 30 yrs at the same rate you would for your personal residence. For instance, here’s what we were told for our most recent deal:
15% down, 10 year amortization, 5 yr balloon, 6.5%
This means the monthly payments are based off 120 equal payments, but I only make 60 months worth of payments on this loan. After 5 yrs, there’s a balloon payment due. I can pay this off, or if I can’t afford it, I re-fi at that point and do another loan under new terms. This is with a local bank. I may have been able to go longer terms w/ a big corp bank, but the ones I found wanted 25-30% down. That slows down our acquisitions so we chose the smaller bank instead. After we establish a positive relationship with them, they may be more willing to be flexible whereas a corp bank has their policies they stick to.
If you know this is something you’re going to do and you’re ready to start doing deals, I would suggest setting up the LLC now anyway - regardless of if this deal goes thru or not - if you want to use an LLC. At least you’ll be prepared when the deal comes along.