We’re forming an LLC for rehabbing and whatever other non-long term holding/rental ventures we do. From what I am learning here and elsewhere, for us this would be setup/taxed and an S-corp.
My idea (and we are finding some interest already) is to attract smaller investors to primarily pool money to provide short-term financing for the rehabbing. These individuals likely would be different for different projects, and some of them may contribute skills/time/materials to the project in lieu of $$$. So each project would look to establish its own “partners” with their $ return based upon their involvement.
How best can I retain overall project management control, yet provide whatever reasonable returns for the interested parties? Do I establish a limited partnership and agreement for each project? Or should I make the repeat partners members of the managing LLC? Or???
I don’t know why your trying to make it so complicated. If you do someting like this your going to be doing alot of work for very little money. Why not look at other options to get your deals finance and fixed. You could make more for your efforts.
Why don’t you setup two entities. One would own the rehab properties and the other would be a member/partner along with you in the rehab entity. Your small investors could then buy into and out of this partner entity as the projects progress and would never be direct owners of the rehab entity.
Just thinking off the top of my head. Understand the entities you structure and if they can own other entities. As mentioned this could be a real headache but once you figure out the process it might fulfill your needs.
Hello Tech, I believe that you’ve made an excellent decision to form an LLC, defiantly for the tax benefits and the asset protection. Your LLC being taxed as an S Corp would avoid the double taxation of a C Corp, however, there are ways to avoid the double taxation, just consult a person experienced greatly in Incorporating. I do suggest to use a consulting company with this, and not an attorney, as the attorney would charge nearly 3 times the amount to set it up.
You also want to setup an outside bookkeeping company to maintain the LLC.
If your goals in Real Estate is to do rehabs, and if you currently have already found sources of capital, than they don’t have to be members of the LLC. You just need an agreement on the interest, rates, and their conditions, and their guarantee of a return or siezing of the property is something goes wrong.
By all means, you could just use a private investment group, where the owners of the company have already pooled people together with money. Now your deal just needs to make economic sense, to be completed and funded.
You can buy the properties and put them in your LLC. Plus the benefits of Incorporating are great. In time, you can build up some nice business credit, and use that money to go get more properties or add to your business in other ways.
I think that this is a fantastic idea. You need to put money down on these properties, and if that causes them to have fair sums of money in equity, then I like 71tr's idea of setting up two entities. You should not hold the real estate in the same entity that you use to build or manage the real estate. If a contractor does not have workman's comp or a worker or manager commits a crime against a tenant, then the liability is limited to the entity that employs these people. A construction worker or an injured tenant could not "pierce the corporate veil", sue and get equity or your personal net worth.
I would be more than willing to pay an attorney to set this up, since so much can be at stake if you do it incorrectly.
Yeah, you guys are seeing this through my brain. I need to find out how to structure the investor group and provide an appropriate agreement that separates me as prop. owner/project management co. and them.
One of the benefits of this is that some of the people I have in mind are already skilled at some of the typical rehab jobsite work. If I can figure out a way to “compensate” them fairly based upon any non-monetary contribution, I think I can save alot in the overall rehab costs and make it a win-win for me and them.
You need to get rid of the I’m a nice guy- your a nice guy attitude. You need to learn I’m a shark your a shark, and I’m a much bigger and nastier shark than you. You see after one month you will run out of willing friends, nice guys, and all those great tradesmen you know, and mark my words they will all then want to be paid. Cash now.
In any event after the first 2 days they’ll be wanting loans, subs, money-in-hand, money-upfront, and they will eventually say "I don’t give a s-**–t about your plans and dreams, I want paid today. The other problem is that they will do $500 dollars worth of worth, but want $1000 dollars for it. My advice is cut your losses now, no free rides for you or them, keep it strictly business. If you cannot pay the man then don’t hire him. Another thing they will bad mouth you behind your back, remember I said they did a $1000 dollars worth of work, by the end of the month it will be spoken about by them as $5000 dollars worth of wonderful work - the best work anyones ever seen. Another thing lets say his / her work is poor, shoddy and junk, how do you fire him, pay him off, or say goodbye nicely. A free tip if you hire 10 men - only 1, maybe 2, has the skills and intelligence you need and will be the type of person you can work with. The other 8 are potential headaches. Good tradespeople are almost impossible to find, and the very best are booked solid and talk cash. In God we trust is not in their vocabulary.
You need to get rid of the I'm a nice guy- your a nice guy attitude. You need to learn I'm a shark your a shark, and I'm a much bigger and nastier shark than you. You see after one month you will run out of willing friends, nice guys, and all those great tradesmen you know, and mark my words they will all then want to be paid. Cash now.
You must be lost or confused :-\ Your rambling is making you sound more incompetent then you probably are.
Techhead:
This is A GREAT IDEA! I have seen only a handful of these clubs and they have worked out very profitably for all involved. There was actually a feature on “investment clubs” such as this and “angel investment clubs” (just a bit different) on MSN money a couple months back.
The way they seem to be structured depends on the group forming the LLC, Corp. , or whatever structure. The article described a board of directors comprised of investors with the largest financial interest in the LLC. These board of directors reviewed possible projects and then brought them to the table for the group as a whole to vote/discuss. To answer RE HUSTLER’s post and expand on a comment you made, the rehabs and development projects were usually under budget and due to the resources pooled (as you were correct in saying) by the investors.
For example: You may have $500k in funds for D.P., I may have an available team of workers that are already on MY payroll (therefore no extra out-of-pocket costs) and our third partner Bob The Builder may have a “hook-up” with a lender to get possible funding pushed through quickly if needed. The profits would be eventually divided in percentages of the inital investment made (which was discussed & contractually agreed to) prior to the projects start.
I personally think an LLC would be beneficial PER project with a seperate entity to “manage” the LLC’s. The managing LLC would dictate the projects, obtain financing from investors, organize rehab, etc. The property LLC does the dirty work and takes the hit if a problem occurs (as funder said).
I have been in the building business for over 40 years, I have employed hundreds of men during this time, and my advice was intended for the small man with limited funds and experience -just starting out. The original poster struck me as this sort of person, in this type of situation.
You have gone to stage 4 - the small/mid-size corporation with adequate funds, accountants, investors, and ample cash to finance sizable projects. This poster will never get to stage 2 with his current plans. Tell the guy the truth, tell him his ideas are based on trust, on goodwill and friendships. Now ask around - whats the main cause of business failures, they are an abuse of trust, of goodwill, and misplaced faith in others.
Better still you join him, you put your money were your mouth is. Lend him your cash, join him. Don’t quote Fortune Magazine type articles, for every business that succeeds and gets into the press columns another 50 000 die on the way. Business success is a rarity and its unfair to him to tell him otherwise.
He needs to learn about men and how they operate IN THE BUILDING TRADE. To put it another way building workers are the scum of the earth and don’t let anyone tell you otherwise. I recall a 1972 friend who employed then over 50 000 building workers, [today probably a lot more] a national mega company with a longtime stock exchange listing - he would agree IN PRIVATE conversations with this statement. This is not the Harvard Business School classrooms- but real life. Big difference.
*Why in private conversations? Because he has to bull shit everyone [including the press] that they have the finest team of dedicated craftmen you can find anywhere- whilst the truth is he cannot stand his own staff and would shoot 50% of them if it was allowed. I know another MD who wouldn’t speak to his men, or visit the factory floor for the same reason. Big firm big profits, big men-running ordinary men
The property LLC does the dirty work and takes the hit if a problem occurs (as funder said). Good luck to you!
For all your fine platitudes you do not seem to realise that another company taking the hit is tantamount to fraud, almost certainly illegal and highly unethical. What your saying is go ahead and take a gamble, gamble with others money and when you become insolvent and cannot pay your bills then defraud your creditors by creaming off the profits [the assetts] into another company set up for that specific purpose. The Creditors are being defrauded and its a no-go- approach to running a successful business.
Seems as though I touched a nerve there huh? ANYWAY, as its childish to argue through internet forums i’ll keep this short.
I have no intention and no desire to “preach” to a “40 year veteran”. I am not an expert nor a Guru, but apparently niether are you. My ONE LINE response was due to the fact that in numerous posts I have seen you berate ideas of some of the individuals with explanations that make no sense. In this thread alone you stated:
For all your fine platitudes you do not seem to realise that another company taking the hit is tantamount to fraud, almost certainly illegal and highly unethical.
One of the MOST posted topics on this forum is asset protection (although being a newbie yourself you wouldn’t have seen that yet) and how to make sure you as an individual can withstand a negative situation be it a lawsuit, fire, angry tenant,etc. The information provided on this thread, AND by many lawyers, AND by the federal government involving the formation of many business entities supports the ability to create, manage, operate, etc. numerous entites. As far as the legality of it, I would bet my only son that it is NOT illegal to have a “holding company” manage a smaller LLC. In simple terms you might know them as subsidiaries. Is that illegal? NO.
I have employed hundreds of men during this time, and my advice was intended for the small man with limited funds and experience -just starting out.
Pay attention to the post, he was referring to grouping small investors TOGETHER thus creating a larger group with more funds. To think you can organize something of that caliber with minimal management is insane. Also, yourself having employed “hundreds of men” should understand that approaching or engaging a conversation with another person in such a negative way does NOT help educate them. Give a solid resource. We cannot post links in the forum so I instructed him as to where to look to get more information. THAT is help.
What your saying is go ahead and take a gamble, gamble with others money and when you become insolvent and cannot pay your bills then defraud your creditors by creaming off the profits [the assetts] into another company set up for that specific purpose.
I’m confused, he would own both companies. Who’s he defrauding, himself?
You have gone to stage 4 - the small/mid-size corporation with adequate funds, accountants, investors, and ample cash to finance sizable projects. This poster will never get to stage 2 with his current plans.
Not stage 4. Preparation should come right after his education. He should learn as much as possible about this endeavor and then prepare himself BOTH legally and financially to protect himself and the other investors. Check the Finance & asset protection forum for more info. I’m sure MCWagner would be more then happy to explain the details.
To put it another way building workers are the scum of the earth and don't let anyone tell you otherwise. I
Just straight out ignorant.
The point is if your going to give advice, give ADVICE. Give INSTRUCTIONS. Give HELP. Don’t spread ignorance and bad information. I can back mine up, please be able to do the same for the sake of the forum. Thank you and have a nice night. ;D
A company can take reasonable steps to protect its investments and assetts with a view to either increasing them or minimising the tax mans demands, but they cannot set up two companies with the blatant intention that if the main trading company [A] appears to be sliding into insolvency, becomes insolvent, then the assetts will be transferred to [B] so they are ring-fenced from seizure.
*Lets return to the OP original claim that he wants to hire or use the services of people who trust him to deliver on his future promises, meaning promises that they will be paid, not in cash prhaps but in some valid and profitable other way, lets say by giving them shares or promissory notes. This raises the question should he notify them that if he goes bust they are not going to be paid, that from the beginning he intends to transfer his assetts to [B] and one needs to ask is this fair to these tradesmen. The answer is no, and every Judge in the land will agree with me.
Forget what your Gurus tell you, if you go ahead with a scheme like this its 3 years in a penitentiary. You then have the Golden Rule to consider, and you must then ask yourself are you prepared to defraud honest tradesmen. The USA has been plagued by these type of get rich schemes and the losers are suppliers and creditors and the State.
Here’s a more concise version of what i was trying to suggest as it seems I wasn’t saying it correctly:
A Series LLC is a special form of a Limited liability company that provides extra protection for personal assets comprised of multiple business entities.
Many form an LLC in order to protect personal assets from a legal claim relating to their real estate investment or business liabilities.[1] Additional liability protection may be gained by properly forming and maintaining a separate LLC to hold each property or business entity. By forming a separate LLC to own and hold each legally titled separate property or business entity, theoretically only the assets owned by a specific LLC would be subject to claims or lawsuits arising against that LLC. However there are costs and administrative burdens associated with properly forming, qualifying and maintaining each separate LLC. Another option may be to form a Series LLC[2], a.k.a. the “cell” LLC, if permitted under applicable laws. Although each cell of a Series LLC can own distinct assets, incur separate liabilities, and have different managers and members, a Series LLC pays one filing fee and files one income tax return each year, if each series member is also a founding member of the LLC. When non-founding members are added to a newly created cell within the Series LLC, that new cell should file a separate partnership tax return for that cell. Furthermore, liability incurred by one unit does not cross over and jeopardize assets titled in other subsidiary units of the same Series LLC.[3] Also, if a business owns real estate used in its operations, a Series LLC may avoid sales tax due on rent paid by the operating series to the real estate series.[4] A Series LLC has been described as a master LLC that has separate divisions, which is similar to an S corporation with Q-subs.
As far as I know (I am not a lawyer nor accountant) these series LLC’s have not been challenged and remain at least fairly untested. It is not as expensive as creating multiple seperate LLC’s, but it DOES have to be STRICTLY MAINTAINED AS SEPERATE ENTITIES. I have seen these used before by developers in NYC, PA, and NJ. Although i’m not sure if they were formed in those states.
I would HOPE that techhead would perform his due dilligence before attempting any of these (his prior posts lead me to believe he will), and I would assume he would be upfront and honest with any partners/associates he took on. I am not suggesting he “defraud” anyone, I am suggesting that he protect himself AND his proposed partners/investors from personal liability. IMHO, structuring his business in this way will help to limit (not necessarily erase) the personal liability everyone may face.
Reply: The subject is one of intention, meaning was there in place a pre-planned scheme of intent to defraud the creditors, the tax authorities, or the State. The next question is “Did the Directors intend to defraud their Corporate creditors by moving assetts to another company, assetts that were undervalued perhaps, did money change hands, was this sum sufficient monetary value to pay for what had been transferred. What became of this money, who ended up with it”. The real weakness in corporate Laws is salaries and dividends. I know of many cases were the Directors get-rich-quick- drawings put the company into receivership. You then have creditors meetings in which the defrauded tradesmen stand up and ask what became of such and such an assett. When I said be tough, I meant in an honest and straighforward way. A workman has the right to be paid and paying him is a sign of respect. In 40 years we never missed a wage bill or payout. Admittedly we had to arrange overdrafts and finance but it was a fact of life. Don’t pay your men and your business folds overnight.
The subject is one of intention, meaning was there in place a pre-planned scheme of intent to defraud the creditors, the tax authorities, or the State.
If he were to direct ALL funds to one organized “holding company” I would suggest this be agreed to and discussed prior to the project. Were it only his portion of profits being directed to a seperate entity of his I would imagine its not their concern.
"Did the Directors intend to defraud their Corporate creditors by moving assetts to another company, assetts that were undervalued perhaps, did money change hands, was this sum sufficient monetary value to pay for what had been transferred. What became of this money, who ended up with it".
I would imagine that the creditors would hold the RE of each individual serial LLC as collateral for each seperate loan. IMHO transfer of the assets to a different LLC is not fraud BUT may invoke the DOSC. If private funding was used (group funds from the investors) i would suggest it be decided AS a whole on the transfer of assets. If not, then I would agree there’s a problem.
When I said be tough, I meant in an honest and straighforward way. A workman has the right to be paid and paying him is a sign of respect.
Don't pay your men and your business folds overnight.
I agree also. Comes down to the basis of “honesty is the best policy”. Beating around the bush and hiding information easily leads to lawsuits and jailtime. Also, payment is a given necessity as your workers are the lifeblood of your business. A coach is only as good as his team and if their “team” isn’t willing to handle their responsibilites they might as well throw in the towel.
This is a personal observation: Investors invariabily become an headache and too time consuming. The biggest problem for the poster is how and where do you learn the PR skills required to keep investors and staff happy. It takes a good man to keep his wife happy - never mind the guy who thinks because he contributes the capital then he’s running the show, or deserves a bigger say in how the company is run and the divison of profits. Its almost impossible to strike a fair balance and if you study the History of the Theatre, and the arguments that take place between the various leading lights, you will see my chain of thought. The same with the film studios. It all ends up in chaos eventually.
Another thing credit is so easy to obtain you can just about hire everything and pay on defferred terms. Its better to own your own company and answer to no one. And crawl into the success books without partners.
I said builders were the scum of the earth, can I rephrase this just 30% of builders are the scum of the earth, and 20% are driftwood, and amongst the leftovers there might be some good tradesmen, I SAID MIGHT, but heres a secret pay these so called good tradesmen what you owe them, pay them in full and you will always be chasing staff. So they get paid - when you get paid, and you deliberately and always owe them money.
I had a partner once, a just one bank check book with 2 signatures required for withdrawals arrangement, he opened a Number 2 bank account unknown to me, and paid all the sales and cash receipts in. After 3 months our prosperous little buisness was his propserous little business, and its not fraud. It was [he claimed] a drawing and expenses arrangement according to him. And this was an honest man. Sometimes crooks have more going for them than some shysters.
Well, this little discussion has certainly snowballed into something other than I intended it to be! It has been both interesting and entertaining.
I have resisted responding to ad hominem attacks and utterly ridiculous assumptions to both maintain my “newbie” status here and keep the moderators at bay, heehee…
Forums of various interests that I have been a part of over the years are typically populated with advice seekers and willing givers, others looking for leads or contacts, and the occasional site pest who usually disappears before too long.
RE HUSTLER (note the caps lock screen name, how appropriate) doesn’t know me or any of the others who have civilly participated. He doesn’t know my history, business, experience, associates, vendors, customers, talents, methods, or accomplishments. None of which took 40 years to build.
I can assure him that his scorched-earth policy of doing business is NOT the only way or likely the best way that things can be done or, for that matter, ARE done. It is unfortunate that he reportedly has wasted “40 years” without realizing this.
While it may be true that our goals of success may be similar, I’d rather leave a positive legacy in getting there than one littered with broken knuckles and busted kneecaps.
“The beatings shall continue until morale improves!!!”
Quote from Techhead: RE HUSTLER (note the caps lock screen name, how appropriate) doesn’t know me or any of the others who have civilly participated. He doesn’t know my history, business, experience, associates, vendors, customers, talents, methods, or accomplishments. None of which took 40 years to build.
Your correct I don’t know you and I fell into your trap. You posted as an inexperienced person looking for help to cross the road, this is known as the injured victim approach, a bystander offers help and it it doesn’t suit you then its either poor advice or of doubtful use.
Yet your the guy who was going to recruit tradesmen to help you across the road, to put money in your pocket, and you intended using their UNPAID for labour to launch you on your way. Meanwhile having ringfenced the assetts [their money] for your use. I say this is unethical, underhand and unfair to the men you employed and to society in general.
You now inform us you’ve been crossing roads all your life and in your own way your a real sharp customer, and help you don’t need. Remember my advice at the beginning about Your a Shark, I’m a Shark, now can you, and others see what I meant, in just a few days my phrophecy was proved correct by of all people, you yourself. So my warning to the world via this forum was certainly correct. Asking advice was a gimmick and sharks attract other fish with gimmicks - so another tip never deal with people who use gimmicks to get your attention.
I don’t know how this discussion became so heated. It was a valid question and valid opinions were expressed. Here’s my opinion.
Partnerships generally do not work out - ESPECIALLY INVOLVING FAMILY AND FRIENDS. Unless your credit is wrecked, then it is easier to simply borrow the money for the deals and do them yourself. If your credit is bad, then fix it before starting a REI business. If you need someone to do the rehab, hire a competent contractor and have a solid contract with them. It is much cheaper to pay someone to do the work than to give away your profit.
You should also be very careful about “pooling” investors. Advertising for these investors can violate a myriad of federal SEC (Securities and Exchange Commission) laws and state laws. You definitely should get proper legal advice.
I am all for asset protection and certainly would place your business in an appropriate entity. However, the purpose of asset protection should be to protect you from the many predators out there. Entities will not protect a newbie from lenders because they will make you sign personally as well as for the LLC. Lenders will then come after your personal assets if you don’t pay them (as it should be).
Thanks Mike, I think we both said the same thing, but you said it better and more concise.
Success is a lot more difficult to handle than failure, and you soon learn that todays friends are tomorrows enemies, and this starts when they realise that your loaded and they’re not. Another thing no one knows how hard you work except you. My overnight success took 20 years to accomplish- I ask you not to tell anyone, it reads much better put the other way around.
