If I have yet to do a deal, is an entity really necessary?

Howdy from Texas!

So I have yet to do a deal but I’m actively looking at properties and I’m curious how necessary an entity is for rehabbing a home? I’m leaning towards not very necessary and a waste of money for now.

I know that a single LLC does not provide much, if any, personal asset protection. It is my understanding that for real asset protection one would need multiple entities layered together(SMLLC managed by LP-very simple explanation but along those lines) and that that can get very expensive very quickly.

Questions:

If I professionally rehab a house(permits, builders risk, vacant dwelling, only deal with licensed & insured contractors and trades, etc.) is an entity really necessary for my first few deals?

At what point should one consider obtaining an entity/entities for asset protection: 1 rental, 10 rentals, $50K in a business account, $200K in a business account?

Should I even bother to register with the county in which I rehab as DBA “REIClub Homes” or should I do it all in my own name?

Is it safe to setup a business account in my own name or should I at least open an account under my DBA name?

Is a business account recommended to help keep personal and business expenses separate? (I have Between $15K-$20K startup capital)

Last question, I promise: How necessary is it to talk to a CPA before, or at least immediately after, my first deal? (definitely leaning towards yes on this one)

I know it’s a lot of questions but this site and it’s members are very knowledgeable and informative, and it’s also FREE :bobble

Any and all comments, suggestions, and/or questions are always appreciated.

Thanks! :beer :beer :beer :beer :beer :beer :beer :beer

Last question, I promise: How necessary is it to talk to a CPA before, or at least immediately after, my first deal? (definitely leaning towards yes on this one)

If you are asking the types of questions on this post, then yes, you need to consult someone.

Always have an exit strategy and a plan B before you begin.

mcwagner,

Thanks for your reply! I definitely plan on discussing these issues with a CPA soon.

I just thought I would throw these out there and see what bites.

Much appreciated :beer

I know that a single LLC does not provide much, if any, personal asset protection. It is my understanding that for real asset protection one would need multiple entities layered together(SMLLC managed by LP-very simple explanation but along those lines) and that that can get very expensive very quickly.

A single MEMBER LLC may not provide as much asset protection as a multi-member LLC. Layered entities may not provide any additional asset protection either. Nothing is absolute. Your individual circumstances, net worth, investment strategy, liability exposure, income tax liability, estate planning requirements, and business continuity needs are factors that will determine the entity structure that will work best for you.

If I professionally rehab a house(permits, builders risk, vacant dwelling, only deal with licensed & insured contractors and trades, etc.) is an entity really necessary for my first few deals?

My personal opinion is that you should not let the lack of a business entity keep you from doing deals. Many successful real estate entrepruneurs have operated as a sole proprietor and have never felt the need for a business entity.


At what point should one consider obtaining an entity/entities for asset protection: 1 rental, 10 rentals, $50K in a business account, $200K in a business account?

Please realize that a business entity does not protect the assets within the entity. If your business activity leads to a lawsuit, all the assets held by your entity are at risk. The business entity promoters push the concept that a business entity LIMITs your liability exposure to only the assets held by your entity and all your personally owned assets are shielded from liability exposure – hence the term: LIMITED LIABILITY COMPANY.

Now, the question to ask yourself is at what point will your personal net worth be great enough that you will want to incorporate a business entity? My personal financial planner tells me that a personal net worth of $2 million is my starting point. My attorney is telling me that liability insurance and a good umbrella policy are all I really need for asset protection, that a business entity is not needed if all I am looking for is asset protection.

Should I even bother to register with the county in which I rehab as DBA “REIClub Homes” or should I do it all in my own name? Is it safe to setup a business account in my own name or should I at least open an account under my DBA name?

Nothing prevents you from establishing a fictional business name (a DBA) for your sole proprietorship. If you are operating under a DBA, then you should have the name registered with your state to first make sure that no one else is using the same name, and, secondly, to prevent anyone else from infringing upon your “brand” identity. Yes, perfectly safe to operate as a DBA and do your banking under your own name , but if you have a DBA then set up your business checking account under your DBA to promote your business identity and to establish your “brand”.


Is a business account recommended to help keep personal and business expenses separate? (I have Between $15K-$20K startup capital)

If you are operating as a sole proprietor, either under your own name or under a DBA, then no real need to segregate personal and business bank accounts. You definitely want to keep a separate accounting of your personal and business expenses to make tax reporting easier. I think the DBA should have its own checking account so you can establish your business identity and more easily brand your business

Last question, I promise: How necessary is it to talk to a CPA before, or at least immediately after, my first deal? (definitely leaning towards yes on this one)

Necessary? I don’t know. Advisable, definitely if you are serious about your business. But don’t stop with a CPA. You will also want to include an attorney, your tax advisor, your financial planner, your estate planner, and probably your insurance agent in the discussions.

Just my 2 cents. Keep the change.

:smile

Dave T,

Thank you very much for taking the time to give me a thoughtful and informative response. :biggrin

A couple more questions if you don’t mind(I’m sure you could see them coming):

Is it harder for a sole proprietorship to build business credit than a entity or is it all the same? (my thinking being that banks might consider an entity a bit more professional thus more willing to give credit)

Also, if I start as a SP and build business credit, will I have any problems if/when I decide to form an entity and want to transfer my business credit from my SP to my “LLC” or is it all about the business name/owner?

Thanks
:beer

I am not familiar with business credit. I operate as a sole proprietor which means that there is no legal business entity. I invest in my own name and use my personal credit to qualify for financing.

I am not aware that a sole proprietor can get a business credit profile that is distinct from his/her personal credit profile. Perhaps a credit guru will step in an answer this question.