Some places online seem to offer prices as low as $250 with a tax ID # and expedited service.
Given the application fee in MI of $100, that seems reasonable.
Anybody have any thoughts on this?
You can do all that work yourself and pay only the registration fee of $100. It’s not like they are providing an operating agreement that will work when you need it. The Internet has agreements that range in price from free to 20 bucks. Those will be just as effective as the one that this company will provide.
I found some forms cheap and a kit for $29. I also found some free info on getting a tax ID number.
I am getting a kit for $29 and doing it myself.
Thanks for the encouragement and information.
This is a great board.
Don’t get too excited. You’re only slightly better off than holding title in your own name.
I have done this several time by myself. It is quite straightforward and you don’t need to pay someone to do it for you. Look at similiar companies and use their format if you need some guidance.
Do you care to elaborate?
Thanks.
An LLC’s protection comes from the operating agreement, not the statute that created it. A cookie cutter agreement cobbled together by someone who has never defended an LLC or has never researched viel piercing will not survive a creditor attack. The free and low cost agreements are very basic and don’t cover crucial topics like executory agreements, charging orders, or bankruptcy.
An LLC doesn’t prevent a lawsuit. It doesn’t scare away lawyers. It doesn’t make someone thing twice before suing. It doesn’t help win a lawsuit. It is needed when insurance has paid what it will and the creditor is looking to satisfy the rest of the judgement with everything you own. It’s not a question of will he get paid. It’s a question of how much do you lose. Low cost agreements written for the general public aren’t designed for this situation. Luckily, most cases settle for the insurance limits and the LLC is never tested.
So is your suggestion to do something other than an LLC or to just pay a lawyer a lot of money to write one?
Also, do you have some examples or references where LLC’s have “failed” to provide protection?
TIA
Hire an expensive lawyer if you have millions to protect. Otherwise, understand an LLC is not bulletproof.
The Albright and Ehmann BK cases.
I understand an LLC is not bulletproof. I view as just a form of protection that is not by any means 100% effective, but of some benefit and of relatively low cost. Plus, it can have some tax advantages.
About the cases you quoted:
http://www.assetprotectionbook.com/in_re_ashley_albright.htm
http://lawprofessors.typepad.com/unincorporated_business/2006/07/the_troublesome.html
I do see what you mean in regards to BK law. However, I just filed for a BK 7 two years ago and will NEVER file for BK again. And even if something horrible did happen that forced me into dire straits, I would not be able to file gain for a number of years.
So in the context of BK, these cases are a moot point.
I am more concerned about civil lawsuits.
Do you have any references for that sort of issue with LLC’s?
Thanks.
An excess civil judgement will put you in involuntary bankruptcy, which makes the point extremely relevant. Creditors want you in BK court because it is much easier to seize assets.
If you want to learn how LLCs are pierced, you can research veil piercing, co-mingling of funds, entanglement theory, and the corporate formalities of LLCs.
I feel the need to weigh in on this discussion a bit. As a real estate lawyer, I set LLC’s up daily for investors. The purpose of having an LLC from an investor’s standpoint is regarding the civil litigation standpoint. They’re not going to help you in bankruptcy, just as BLL says. Although, I doubt anyone ever thought they did, because unless your LLC has very impressive assets, any loan it takes out will still require personal guarantee from one of the owners anyway.
The entire point of organizing an LLC to hold and operate your real estate portfolio (aside from tax advantages) is to avoid civil liability. BLL refers to piercing the veil. The veil is the LLC organization itself, and piercing it means going beyond the assets of the LLC itself and into the assets of the owners/shareholders of the LLC. This is not done by creditors (see previous statement regarding personal guarantee), this is done by Plaintiffs.
When you own property, there’s a multitude of things that can go wrong within the premises. Slip and fall, trip and fall, fires, etc. I had a client once who had a tenant that let her kids pull out the drawer underneath the stove and stand on it to cook. It doesn’t take a rocket scientist to realize that there is a serious chance that stove might tip over, and it did just that: landed on the kid and killed him. Luckily, the tenant could only sue the LLC, and not my client. They tried, as all Plaintiffs do, to pierce the veil, but they were unable. This is because I required him to utilize all the formalities (as BLL stated in an earlier post) to MAKE SURE that the LLC was a separate entity, and not just an extension of him.
As you build an aggressive real estate portfolio, it’s even wise to have multiple LLC’s controlling separate properties. This way, if something were to happen, they couldn’t wipe out your entire real estate portfolio. I personally set a new LLC up with my company for each property we purchase to hold. It’s easy to do, and just further insulates your hard earned assets.
Lawyer aside, as a real estate investor myself I’m a very strong believer in the need to protect that which you’ve fought so hard to create. If you have any questions, I’d be happy to answer them.
Bingo.
Thanks.
We are Canadians looking to start a REI Company in Texas We are trying to decide on what entity. Any advise?
Thanks in advance
jdproperties:
I personally advise that all investors that are just getting into real estate establish a Limited Liability Company. An LLC is perfect for the beginning and seasoned investor alike in that it allows you 1) the liability shield of a corporation, with 2) the (typically) advantageous tax treatment of a partnership, yet 3) the flexibility to do what you want without a lot of the formality requirements of, say, a corporation.
For larger, more established investors, I have recently found that subchapter-S corporations (or S Corps for short) have a tendency to be a better suited for various tax purposes. While I am not as well versed in tax implications as an accountant, an S-Corp can be better than an LLC when a lot of money is involved because each year an LLC “passes through” it’s income to the owners. This can be a problem if, for example, the plan is to let the money sit with the company in order to maybe acquire more assets in the future, cushion maintenance and debt service, or what have you. So that typically leaves the LLC members stuck with a tax bill on “income” they never actually received. There are certainly ways around this (e.g. a year end disbursement in an amount to cover the anticipated taxes), however if the investment company is large enough, an S-Corp might be something to look into.
Now back to your question, jdproperties – your situation is different since you are from Canada. No matter the size of your real estate operation, an LLC will likely be the way to go for you. Because an S-Corp has some lenient rules regarding various aspects of it’s legal operations (compared to a C-Corp), it also has some restrictions. One of those restrictions is that it must be owned by an individual (not another LLC, for example), who is a U.S. citizen. As a Canadian citizen, that obviously poses a problem. No worries though, as, especially if you’re just starting out, an LLC will be your best bet 9 times out of 10.
Good Luck!
Thank you for taking the time to help us.
This is good stuff. I’ve got a few other questions in this arena.
When would you put a rental property into an L.L.C.
I will be buying with cash and then doing a cash out refinance as soon as possible.
Should I wait until after the cash out refi?
Then deed it to the LLC?
Could that make the lender call the loan or something?
Everything else makes sense but this is the part that’s unclear to me.
Thanks!
anf301,
Why an s-corp instead of an LLC taxed as an s-corp?
I’ve looked into this because I have an “S Corp”, a “C Corp”, as well as an “LLC”.
Depends on what the LLC is used for. If for rentals, then it’s mostly “passive income” NOT SUBJECT to employment tax. As far as I know, there are limitations to the percentage of “passive” income an “S Corp” can have, and the IRS would want to see ALL of it active income, and they would want you to pay yourself a salary out of the passive income. On an LLC taxed as a propreitorship, or partnership, no such need to declare active income.
Bottomline, you want to keep all of the income passive if you’re doing rentals. If you have the LLC doing rentals in an S Corp, be ready to pay a salary.