Can anyone give me an idea of how much it costs to set up & maintain an LLC? I am clueless in this area. I don’t own any rental property yet. Would it be better to set it up before i buy any properties? Thanx
Mike
Can anyone give me an idea of how much it costs to set up & maintain an LLC? I am clueless in this area. I don’t own any rental property yet. Would it be better to set it up before i buy any properties? Thanx
Mike
It depends on the state. There is the annual fee which I have seen range from $50 to $800 per year. There is the annual fee for the registered agent, which is typically $100, but you can be your own registered agent for free if you want everyone to know where you live. Then, there are state taxes and local business licenses. In most states, an LLC must have a lawyer represent it for evictions and any other legal actions. That’s easily a few hundred each time in addition to the filing fees. You’ll need a CPA to do the LLC taxes and required notices. Insurance will cost more since it must be in the name of the LLC and you’ll have to research a bank that will loan directly to an LLC. A good operating agreement will cost about a grand. A cheap one will work until you get sued. If you plan to manage the LLC yourself, you’ll destroy the separation between you and the LLC and make the LLC a big waste.
Will you have other assets besides rental property and your personal home? An LLC doesn’t protect rental property it owns and homestead exemptions offer more protection than an LLC.
BLL is most likely much more knowledgeable than I am but I do want to mention this
I think a lot depends on the state you are in, those laws & your purpose to have an LLC.
In AZ I was able to set up our own LLCs (was simple - forms online at the AZ state website) & for the purpose of 2 things…
one had to do with credit… since we are self-employed having credit cards in an LLC didn’t show up on our credit report & made our debit ratio better
the main reason we did it was to not have all property in one ‘name’. If someone has an accident on one property, & took us to court etc, they might get property held in the name of that LLC - but being able to sue us for the property not in that LLC would be much more difficult.
BUT I am not a lkawyer or accountant or CPA so please this is not meant as advice!
I don’t want to be argumentative, but while I do think LLC s are often over-rated (I’m sure Mark will share his feelings on this), I also think that BLL over-states the complexity. E.g., a one-owner LLC (aka a single member LLC) doesn’t even have its own tax return… so the LLC creation by itself shouldn’t require a CPA.
If you’re interested, BTW, my sigs below point to web sites where I sell do-it-yourself llc incorporation kits. These kits are really more tailored for active trades or businesses… but the web sites will probably provide you with useful info.
I think it’s good for people to have different opinions and share them. We just agree to disagree and readers can make up their own mind regarding what they want to do. My problem with simple or DIY planning is that it doesn’t work as expected. It’s too simple with too many areas left un-addressed. An excellent example is the executory versus non-executory operating agreement. LLCs that aren’t executory have limited charging order protection. Simple LLC operating agreements that I have seen don’t have this type of language and that leaves a big hole for a creditor to exploit. Maybe single member LLCs would offer more protection now if Albright had an operating agreement that limited creditors to a charging order. The judge might have ruled differently and the SMLLC could enjoy charging order protection. Just about every major case where an LLC has failed is partly due to an area that was not addressed properly in the operating agreement.
DIY planning can have even worse consequences. People don’t understand what they are doing and say something stupid in court. The Townleys, like most people, believe it is legal to make transfers to entities with the intent to protect those assets from future liability. Supposedly, there is no problem because there are no current problems. If people actually read the statutes that apply, they would learn that any transfer with the intent to delay, hinder, or defraud a creditor is fraudulent. This law applies to future, unknown creditors for future unknown acts. It is irrelevant that there are no current creditors or any possible, future claims. Maybe the Townleys would have said something different if they knew this fact. My favorite is the member-manager who puts a each property in its own LLC. Managing just one LLC creates a pretty easy way around the LLC and creates a link to others. They just get sued personally as the individual that created the injury instead of the owner of the business.
LLCs are pretty straightforward to set up and can be done without a CPA or attorney. I don’t dispute that, but what’s the point? Those cookie cutter agreements won’t withstand a determined creditor and creditors aren’t as stupid as the gurus portray. They have asset protection seminars just like investors. They learn the latest gimmicks used to hide/protect assets and how to defeat them. People don’t understand the nuances of the LLC or how the legal system actually works. If they did, they would have operated the business differently or included proper language in the operating agreement. I still get a chuckle when people talk about how a series LLC works in a non-series state (e. g. DE series in CA). They just don’t understand that no state is required to follow the laws of another if the two don’t agree. These differences keep conflict law attorneys fully employed. I think DIY kits are good for their educational value.
The best asset protection doesn’t even look like asset protection. It is subtle and it’s not found in books or seminars. It is discussed in bars when the legal seminar is over and people discuss actual cases or clients. It is discussed on the golf course or among friends in a social settings. Hire a pro who actually practices in the area and make sure it is done right the first time.
LLC’s are inexpensive. the heavy lifting is done by the operating agreement.
Although, as BLL points out, you cannot realize ALL the benefits while you are managing the properties yourself, you have already put the foundation in place to build the business without having the hassle of “moving” things into place at a later date.
I believe that no one should own investment property in their own name. It’s just too simple and inexpensive to do it right from the start.
Thanks to all for this great thread.
My next question - based on everything I’ve heard/read…
If someone (or two 50/50 partners) own(s) rental properties and personally/actively manages them - is there ANY real point in owning those properties w/i LLCs?
Would it be just as smart to take the annual cost of an LLC ($250-$350) and put it toward additional liability insurance?
And, could someone give a specific example or two of what kind of operating agreement is smart, and what kind can get someone in trouble down the line? (I know each individual case is very different from the next, but I’m trying to wrap my mind around kinds of operating agreement language are desirable or not.)
Thanks again
No problem if the managers aren’t members. A good planner will work out the various options for your situation.
LLC is not a substitute for insurance and vice versa. Insurance is the first line of defense. LLC and other planning comes later. Think in terms of layers.
Manager-managed, executory operating agreements are good. Member-managed or non-executory agreements have issues. We only know about the ideas that have successfully defeated LLCs. There’s no way to know what will work and what won’t until it actually works or fails.
Thanks BLL,
My particular situation is that my partner and I are both members (the only two members) and both actively manage the properties - no management company.
I understand the idea of layering our protection, and we do have an umbrella liability policy.
In your opinion, is there anything in particular that we should consider regarding our LLC/operating agreement - especially considering that we are both members and do actively manage the properties?
Thus far, I’ve taken the approach of being excessively professional in our management and to have a big umbrella policy over us. I’m trying to think extremely worse case scenario and learn what else I should be considering.
Thanks.
hart,
Sit with a qualified planner to review your specific situation. My posts here are only general information.