LLC cons

General Real Estate Investing
1

After a lot of research over the past year I dont think LLC is worth it. I love to learn so please explain if I am missing something.
A lot jump into one and don’t receive any benefit for all the extra cost & time. One report I read said most don’t operate correctly so no benefit. Even if you do it perfect a good lawyer can sometimes get around your LLC. Just has to prove LLC not operated exactly right or was setup solely for assets protection.
Costs:

  1. LLC Setup which you can do yourself and yearly fees,

  2. Must have separate bank account so Bank fees for checks and monthly fees if low balance,

  3. Little extra for tax return preparation,

  4. Deed in name of LLC so extra for commercial insurance since LLC must be first named insured.

  5. Hard to get commercial loans and at the very least pay a higher rate and fees

  6. For good protection you need to have at least 2 members. Isnt there risk having a second person you think you can trust.

  7. With thousands of post about LLC’s on a lot of different forums have not seen one about how a person said an LLC saved them in a lawsuit. In ths day when people are sue happy.

  8. Very little talk about the cons, is this because people just dont want to hear it.

  9. Are they just for the type of people that buy every type of insurance or extend warrenty they can get thier hands on just in case it might help.

2

EGAD! No benefit? You’re missing the point! It’s not about your convenience, it’s about ASSET PROTECTION.

If you own property in your name, you become a target for a lawsuit. You rear end someone on the parkway, the ambulance chaser does an asset search and BANG you’re sued. And when you are, ALL of your assets are at risk, including your income producing properties. You have a tenant slip and fall and BANG, you’re sued. And ALL of your assets, including your personal assets are at risk.

Owning property in an entity seperate from you protects your personal assets from risks that arise from your property ownership. The correct entity also protects your income producing property from risks arising from you personally.

This is why I always recommend the LLC form:

Corporate stock ownership is considered an “investment” that can be seized to satisfy a judgement against you personally. This puts the adversary in control of your business and its assets.

An LLC is considered “personal property” and as such (in TX) is not available to satisfy judgements to creditors. [You don’t hear about how LLC’s “saved” someone because LLC’s don’t get sued --there’s no money in it for the bloodsucking attys. Too hard to bust one for not enough payola.]

Both forms protect you personally from liabilities arising within the business, but only the LLC protects the business from your personal liabilities.

Get educated before you get hurt. Yes, you have to do it right. Yes, you have to follow the rules. Yes, it’s a pain in the a$$. That is the cost of being properly protected. One in five property owners will be sued this year.

3

An LLC is considered “personal property” and as such (in TX) is not available to satisfy judgements to creditors.

Have not heard this before. Do you happen to know if this also applys to Virginia?.

I had read you should have more than one member in an LLC so that you are not the sole owner of the asset which is stock of the LLC. Hard for them to take something that is not a 100% yours.

How do most address the second member issue?
It seems you have to pay a third party what does this cost?
Or take the risk with someone you know.

Also seems to maybe work with a free & clear property. But if a property has a note with your name on it, would it not be very easy to prove the LLC was for asset protection only?

Thanks for any info. On other forms over the past year nobody even wanted to hear about or discuss any of the cons. So my info was limited.

After a lot of research and speaking with my attorney last year I had decided to just increase my liability coverage to 1 mil. even with my free and clear properties. Most would not but did have one of my banks agree to let me transfer deed on 2 houses to a LLC but loan would still be in my name.

4

Good points and most of these have been addressed in other posts.

The protections of an LLC are enshrined in state law (TX LLC Act) and therefore would apply even if the LLC only has one member.

Ideally you purchase and finance the property inside the LLC. Absent this, however, you can still deed the property and assign the mortgage to the LLC, although technically this violates the DOSC. I frequently see lenders that will finance to the LLC as long as they also get a personal guarantee from the member. If the lender will do this, it is a good option until the LLC establishes credit.

selected sections from the Virginia Uniform Limited Liability Company Act:

(b) A distributional interest in a limited liability company is personal property and, subject to sections 5-502 and 5-503, may be transferred, in whole or in part.

§31B-5-502. Transfer of distributional interest.
A transfer of a distributional interest does not entitle the transferee to become or to exercise any rights of a member. A transfer entitles the transferee to receive, to the extent transferred, only the distributions to which the transferor would be entitled.

§31B-5-504. Rights of creditor.
(a) On application by a judgment creditor of a member of a limited liability company or of a member’s transferee, a court having jurisdiction may charge the distributional interest of the judgment debtor to satisfy the judgment.

This all says: LLC membership is personal property. A creditor of the member (personally) cannot become or exercise rights of a member, only receive distributions to which the member is entitled. Now, here’s the really good part: The IRS has ruled that a creditor receiving a charging order against a member, must pay taxes on the member’s portion of the LLC income to which the charging order applies. This means that if you’re sued and lose, and the creditor receives a charging order against LLC income, the CREDITOR has to pay taxes on YOUR portion of the LLC income. Yet, since they don’t receive rights of the member, you (as the member) can simply choose to never distribute cash, therefore frustrating their efforts under the charging order. In short, they pay the taxes on the income but never get any cash out of the LLC since you still direct operations.

So how does this benefit you, you might ask?

One of the strategies of asset protection is to avoid being sued in the first place. Yes, a competent atty may be able to bust an LLC. But remember, attys (especially the ambulance chasers) work on contingency and are looking for “easy money”. Tracking down who really owns the property, making a case against an LLC, obtaining a charging order and attempting to foreclose the charging order against the LLC all take time and effort. And cost the atty money. Anything, and I do mean anything, that you can do to make the atty’s job harder or more costly lowers the likelihood that he will take the case in the first place. And that’s better protection that liability insurance, which has limits. One more weapon in the arsenal (or shield in the hand).

And that doesn’t even touch on trust strategies.

5

there are really two question within this topic.

Will a LLC prevent you from getting sued? absolutely not.
Any atty is ogin to follow the standard play book move of naming everybody on the suit, your LLC, you, your spouse and anybody else remotely connect to the situation. At that point you have to get a lawyer and file motion to remove yourself (persoanlly from the case).

Most threats of lawsuits are from some two-bit tenant who has no idea how much it cost or time to actually previal in a lawsuit. At worse you end up in small claims so you still end up in court either personally or in the capacity of mgr of the LLC. :stuck_out_tongue:

Will an LLC protect your assets? Well it will certainly make it more difficult for a prevailing plantiff to get their hands on it.

The legal system is a war of attrition (a lawyer friend of mines words, not mine). The more barriers you can put between a greedy plantiff/lawyer and your pot of gold, the better.

6

This may have adressed before, but I am new. Me and my wife own one rental property. We are buying one this month, and a couple more this year.

I am considering LLC but I do not understand the franchise tax in Texas. I have talked with the Comptroller office and my questions went deeper than they wanted to go. I have all the paperwork in place, names approved, Etc for the LLC.

I see there is net taxable capital @ .25%, net taxable earned surplus @ 4.5%. Do I have to include my earnings, interest, and other investments outside the LLC? The person I was talking to said yes, but their website indictated it would just be from the LLC. I see that your gross receipts plus surplus(?) have to be $150,000.

I understand what you are saying about protecting my assets but will it be cost productive for a small investor like me? If someone sued me right now all they would get is a bunch of mortgages and not much cash.

Hope I can get some feedback on what people are paying in franchise tax.

Thanks FB

7

old law: under $150,000 gross = no tax.
new law: I think this special session set the threshold at $50,000. Don’t know the new rates off the top of my head.

It would apply only to the LLC, not you personally.

8

Thanks for the response.

I guess one of the things I do not understand about the franchise tax is let’s say I own 5 houses worth $100,000 each and I have 10% cash in each one. I have $30,000.00 equity in the homes. Let’s say I have really good year and make $70,000 profit on rent and sales of a home, this is after all my deductions.
Does the state tax me a franchise tax of .25 or 4.5% on the 70K + the 30K, or does it include the 300K the houses are worth + the 70K?

After this I have to pay my taxes on the profits on my personal tax return…isn’t this double taxation?

I could not get the comptrollers office to answer these questions, they said it was "deeper " than she could go.

I may not be asking the correct questions but I am tryong to get there.

Thanks again, FB

9

well, it’s more complicated than I can get into here. Under OLD law it would have been the greater of:

.0025 times net equity of the LLC
or
.045 times IRS net income - with some adjustments.

this is VERY simplified. I haven’t read any details about new law yet.

double taxation? No. the state is only taxing you once. the feds are only taxing you once.

If you’re making that much income, taxes are a “good” problem to have. However, you may have some tax options available to you that would reduce your taxes somewhat. Electing corporate taxation will usually give you a lower tax rate, but distributions will be taxed again personally (THAT’S double taxation). But if you don’t plan to take distributions and reinvest all your profits, then that may be better for you.

Remeber, rental income is passive and not subject to self employment tax. income from flips is ordinary income and subject to self employment tax. capital gains from selling rental homes is capital gains to you personally.