Member Breakdown of New LLC

General Real Estate Investing
1

I am looking to start a LLC with my girlfriend (Soon to be Wife). Our plan is to invest in rentals and potentially do some flips. My main question is the breakdown of the LLC members. My girlfriend and I make about $120,000 a year with our jobs however I am curious if it would be beneficial for me to add my father as a member. He owns a medium sized company and is financially set. Will this help the LLC in the future when it comes to the personal guarantees and lending? What are the pros and cons of adding my father as a member to the LLC?

Thank you in advance!

Dan

2

There are no pros to adding your father. The LLC is also a waste unless you plan to have someone else manage the property.

3

Thanks BLL

I have to say I have been going to meetings and investment clubs for about a year. It seems that most of the individuals are starting LLC’s. I actually spoke with the speaker last week (investor for 15 years) and told him my situation and he said the earlier I start the LLC the better. He owns 75 properties. Also in my area (minneapolis) hard lenders that I have been meeting will only loan to LLC’s. I have to say I am a little confused.

As for my original topic. I was told that this was an option from a commerical loan associate that was a family friend. I am hoping she had some logic when she told me about avenue.

Thanks for the Input. I appreciate it! Back to the drawing board I guess.

4

Most people have been fooled by Asset Protection gurus selling fear. Unfortunately, the plans are little more than cookie cutter junk that doesn’t work when challenged. They also leave the typical investor wide open to having the LLC ignored.

Read the actual cases that define LLC law and you will learn how they work in the real world. You don’t need advanced planning until your net worth is at least several million. Insurance is the most cost effective solution until that point, but gurus don’t mention that because they don’t make any money on it. Put your time and money into building your business.

5

Commercial loans can be made to individuals; they are not restricted to incorporated business entities.

6

I realize that commercial loans can be made to individuals. My question was would it be benefical to have a member of the LLC for the simple fact that he or she has a lot of liquid assets. The few people I have talked to that are in the lending industry said that it wouldnt hurt. Just thought I would get some feedback.

As for BLL. I spoke with an attorney yesterday who specializes in real estate law. He highly recommended that I set up an LLC. He said for the $300 it would cost and the headaches it could save there is no reason not to. I also heard a few horror stories from him. Thanks for the advice not to but when most people in the industry are doing it (at least around here) and when a real estate attorney is telling me to, I think I will splurge the $300.

Thanks for the feedback though…wish me luck

7

This is for the other people who read this post and not the OP. I want to clarify a few points for you to consider when deciding to use an LLC.

Asking a real estate attorney about an LLC is like asking a podiatrist about cancer treatment. He may be legally qualified to treat cancer, but he isn’t a specialist, doesn’t keep up with the latest trends in oncology, and doesn’t have much experience in that area. The law is the same way, except it’s worse. Laws vary from state to state and what works in one may not work in another. At least medical treatment is not location dependent.

LLCs are business entities that have nothing to do with real estate. Setting up a proper LLC is done by an attorney who understands corporate governance and entity structuring and has experience with debtor/creditor law. There are also estate planning and tax concerns among a host of other issues, but a competent attorney will work in conjunction with other specialists as needed. Real estate attorneys are qualified to draft the deed to transfer property into an LLC and advise on matters regarding title. They don’t litigate liability.

For $300, you are getting a cookie cutter operating agreement instead of a customized document specific to your individual situation. Most, if not all, of these types of agreements lack current information because they are not updated frequently. In fact, the attorneys and gurus who sell them don’t even bother to update themselves most times. An LLC is nothing more than easy money to them. Bang them out for a few hundred a pop and you can really supplement your practice. The best part is that the client won’t come back since there is never an issue or insurance settles if there is. In the case of an excessive judgment, the cost to defend the LLC is upwards of $50K and the typical investor doesn’t have the resources to fight. He will just go into BK, either voluntary or involuntary.

Here is the worse provision I have seen in a low cost LLC operating agreement. It requires the LLC to distribute funds when possible. That has the effect of guaranteeing a creditor with a charging order will get paid. There is no charging order protection when avoiding distributions is not allowed by the operating agreement. A competent attorney would never include that type of language.

There is no charging order protection unless the LLC requires material support from the members. That means your partner’s creditor can become your business partner when he forecloses on your partner’s interest rather than settle for a charging order. If there is no partner, he can take your place and liquidate the LLC to pay the judgment.

Creditors aren’t stupid and are creating ways to force a settlement when they can’t pierce the LLC. The current favorite is a charging order with new provisions.
The LLC can’t distribute money to anyone.
The LLC can’t sell major assets.
The LLC can’t buy majory assets.
A receiver is put in charge of the LLC. Some receivers charge upwards of $600 to manage the LLC. How long can you operate under these circumstances?

Even with solid LLC practices and few LLC assets to pay a judgment, creditors can get paid by arguing any money taken out of an LLC by a member is a fraudulent transfer and ask the judge to order it back into the LLC to pay the debt.

The most important thing to remember is that you are always personally responsible for your own actions regardless if you are acting on behalf of the LLC or not. An LLC doesn’t protect you if your action or inaction caused an injury. You are personally responsible and your personal assets can be used to pay any judgment. It doesn’t matter if you acted on behalf of an LLC or not. It is not a consideration. You are personally responsible because you caused the injury. The LLC is responsible because you were acting on its behalf. If you are going to actively manage the business, use another vehicle to own your personal assets.

Don’t forget the operating expenses. There is the registered agent fee and the annual fee. States are starting to require a business license and charge an additional fee. You’ll need to pay for tax preparation each year unless you understand the tax implications of an LLC. In most states, an LLC must be represented by an attorney in court, even for simple matters. These funds are better spent growing a business when insurance provides enough protection.

For an LLC to be needed, the creditor would have to refuse to settle for the insurance limits and to get a judgment that high you would need to do something really stupid or get the jury to hate you. Most cases settle for the insurance limits before trial is even a consideration.

8

BLL,

I believe that you know what you are talking about and I will not even ask you for your credentials because I have already said that investors who I have talked to that own literally 50+ homes went the same route that I am planning to do. I dont know if you own 50+ homes or if you are an attorney or a commercial real estate broker as you have given me advice in all areas. I just know that you are the only person I have talked to that is advising me to do the opposite.
As for the $300. $190 of it goes to the state of Minnesota for the filing fee so they are not nickel and diming me. It is a friends father who I actually rented from in college so he is in the business. I think you are assuming that everyone is out to get new investors and many, if not all, attortneys dont not know how to write an operating agreement.
There is no annual fee for holding an LLC in the state of Minnesota. There is an annual filing requirement but it does not cost money.
I also realize that you are personally responsible for your LLC and for your actions.

I am going to listen and learn from the people who are where I want to be and have achieved similar goals. Not that you have not achieved those goals but I do know these people and I do trust that they know what they are doing. I am going to take the same steps and go the same route. I really do appreciate the guidance from you but I joined this site for advice and incouragement, not pessimism.

9

Before you blow off BLL’s advice, ask yourself what you gain by having the LLC versus holding your property in your own name.

If you honestly answer the question, I bet you will see that there are no real legal benefits and no tax benefits in establishing an LLC before your rental activity even gets off the ground. If you explore further, I bet you will find that there are few if any commercial lenders that will even give your LLC a loan to buy property.

In your circumstances, I agree with BLL. The LLC adds no value to you as a new investor with your proposed investment strategy.

10

Thanks, Dave. I appreciate the support. Like most investors, the OP is just following the herd when it comes to this area. It’s like the post in the Random Ramblings section where someone asked why a person follows a particular religion. Is it because that’s the way they were raised or is it because they researched religions and actually chose one? We have the same thing here. The OP hasn’t done research. He is just doing what everyone else is doing. Anyone who actually reads LLC case law will learn when they are effective and the types of situations where they fail. They will also learn when they are appropriate to use. People waste all this money to protect an empire of essentially future hopes of wealth instead of putting that money into something that will actually help grow their business, like reducing taxes. Every investor I know is subject to taxation. I know none with an excess judgment that wiped them out. Yet people spend more time and money worrying about getting sued instead of worrying about how much the government is taxing them. The gurus have done a great job promoting their product.

I wonder how these people who said the LLC is a good idea can back up their answer with case law instead of parroting the guru line. I also like the fact he pointed out that he knows he is personally responsible for his own actions and his LLC. If he truly understood he is responsible for his own actions, he would know the LLC won’t protect him from his own liability and would have asked what options are available to isolate his assets from his liability.

Here is the mark of a good attorney who drafts LLC operating agreements. When he learns of a new case that affects LLCs, he considers how to adjust operating agreements appropriately and then contacts his clients to make the changes. I wonder how many people who have the low cost LLC actually get a call from the person who set it up explaining that the operating agreement needs modification due to new case law?

11

Excuse me, but you do not know me, my situation, or these people that are guiding me. I HAVE done my research BLL. You are turning my simple question into something way more complex then it should be. I do not want to be an attorney; I want to invest in real estate. If I want to invest in real estate I want to learn from a real estate investor not an attorney.
I also do not know what “guru” you are talking about. I have never purchased a real estate course in my life or listened to the so called real estate pro. These are simply people that I have met through friends, family and groups in my area. They are not trying to get any money from me what so ever. They actually care about my success and offer productive advice.
BLL – I have read several of your posts and I don’t really know what your agenda is on this website. It seems that in every post you either ridicule people for not doing it the “right” way or basically getting in wars with people about how to invest in real estate. I did choose the route I wanted to go in real estate myself. It is not the way I was raised and I am not following the herd. All you talk about is how my mentor can back up his LLC(s) with case law. IT IS REAL ESTATE man. I would rather take real estate lessons for free from someone I know and trust and who is very successful rather then some guy sitting on his computer pretending to know everything there is to know about law and real estate and who is “always right” in his posts. The truth is you probably have done 10 transactions in real estate, which is less then me and I am only 25. I suggest that you think twice before saying “I don’t have time to educate you” or “you clearly don’t know what you are doing” in these posts for people who are just asking for advice.

I wanted to start a LLC because hard money lenders in my area (that I have spoken with) will only lend to a LLC. I’m not just starting one for the sake of starting one. That wasn’t even my question in the beginning. As for lenders not lending to a LLC, that is not true at all. In fact my original reason for starting the LLC was because we had several banks lined up that lend to my friends NEW LLC. I do have a system in place that I am going to follow. So stop criticizing and dissecting everyone’s plan…

12

Since you already have your mind made up, we are not going to try to talk you out of it. I have nearly 30 years in the trenches as a landlord. I have a seven figure net worth. I own all my rental properties in my own name.

My own financial advisor and my own attorney both tell me that an LLC is a waste of time and money for my investment approach and the way I conduct my rental business. Both tell me that adequate liability insurance is all I need, and that I am not yet rich enough to worry about incorporating my rental activity.

Both are respected professionals in their own right, and both advised against going with the LLC “trend”. Both tell me not to worry about asset protection, but instead worry about estate planning and probate avoidance. My advisors are telling me that I don’t need LLCs, instead I need trusts. BLL does not know me except through my posts in these forums and his advice mirrors that of my own advisors.

We all concede that there is no one-size-fits-all correct answer for everybody. Your circumstances may be so unique that an LLC actually does make sense. I can only suggest that you consider getting second opinions from licensed entity structure, legal, and tax professionals that are not soliciting your business.

13

Dave T, Thank you for telling me your situation and experience. That does a lot more for me then some random person telling me not to do something. I will definetly get a second opinion about my plan into the real estate world. Congrats on your success and I hope you will be helping me out in the future in these forums. I do also appreciate BLL for the advice, it just came off as a little blunt and rude. You both are obviously very intelligent in your respected fields of expertise. Thanks for the input.

Dan

14

I am blunt, but I don’t intend to be rude. My goal is to make people consider all aspects of what they are doing. That is basically bringing up points they never imagined or how what may seem like a simple matter is more complex.

15

Just one more comment, then I will get off my soapbox.

If you are still willing to listen to us, your original question asked whether your father should be a member of your LLC. We assume that you believe you need the strength of your father’s financial statement to secure loans for your LLC. Someone you asked in your sphere of friends and advisors told you that it would not hurt.

You were told that because a NEW LLC with no assets, no credit history, and no track record is not just given a commercial loan. New LLCs can get loans but they are personally guaranteed by the members of the LLC and given based upon a review of the individual members’ credit worthiness. In other words, it is not the LLC that gets the loan, it is the members that get the Roan on behalf of the LLC. If the LLC fails, the individual members are still liable for the debt, both jointly and severally. This means that each member is individually liable for the entire debt.

BLL told you that “there are no pros to adding your father.” You seemed to accept his response without challenge. But during the course of your discussion in this thread, I get the sense that you are planning to do it anyway.

Since your father has an active business, he has a higher probablility of being sued. If your father is also held personally liable, his interest in your LLC is at risk, and (as BLL pointed out) his creditors could force you to liquidate the business or lose control of the operation.

BLL tried to point out that there is a flaw in the boilerplate operating agreements in the do it yourself LLC kits sold to the unsuspecting that give judgment creditors extraordinary loopholes to jump through and seize control of your company.

I strongly recommend that you and your father get a professional legal opinion on this question, too. Real estate investors are not attornies (usually), mortgage lenders are not attornies. You need someone with the relevant legal expertise to answer your question.

As I step off my soapbox, let me close by saying that I am not an attorney and I am not dispensing legal advice. I am simply stating my opinion which you are free to do with as you please.

16

I find this a very curious thread.

You are a first time poster on an internet message board and then complain about getting random advice. Who exactly did you expect to hear from?

Then you claim to know the experience of others (in a rather rude and denigrating manner, I’ll add).

Whether anyone here has done 10 deals, 10000 deals, or wouldn’t know a real estate deal if it hit him in the head is irrelevant. You asked a question and were given some pretty good and obviously skilled advice by someone who clearly spent a lot of time writing it on your behalf. Throw it out if you will but consider that if you search hard enough, and only ask people who are close, you’ll almost always get the answer you want to hear. Does this serve you?

I’m the last person to claim you get what you pay for. On a practical matter though, what kind of LLC can you get for $110 ($300-$190 filing fee). Does this really include an operating agreement? I can’t imagine, but must note I am thrilled it’s from a friend’s father from whom you’ve rented. I mean, who needs the internet when you can get this kind of sage legal advice.

Sometimes blunt advice is the best advice.

Take heed.

17

Thanks, Equity.

18

Equity,

I think you missed my point…

I’m not complaining about getting random advice. I did come on this site to get random opinions. However, my point was that the response I got was not about my original question. I did not ask if an LLC was a good idea to start when doing your first deal. If I had asked that, then yes it would have been a relevant opinion. But someone shooting off that an LLC is bad idea is basically saying you don’t know what you are doing and a LLC is stupid and worthless. Which the people who I have met with personally who have been doing this for years say that it is a must do (but that is a separate issue in itself).

And yes I have been getting advice from successful investors and I did not mean to come off rude. It is just a lot easier to take advice from someone I know personally in the business then to someone in an online forum. I asked the question about the LLC member breakdown on here because I wanted an opinion from someone who has experience in lending to LLC’s. Hence that is why I did not go to the investors I know, because they are investors, not financial experts.

The $300 LLC was basically a friend’s father that is willing to help me out. He was not going to charge me an hourly rate for his services, just the MN state filing fee and a small office fee for their filing. And I am not sure if you were taking a shot at his advice but he is a very intelligent man who has helped me out in the past many times. (He is also not a lender and did not know the financial benefits that a bank would recognize when lending to a LLC.)

And blunt advice I can live with. Rude advice however is very disrespectful in my mind. First off, if you are going to tear apart someone’s business idea you better know exactly what their situation is. You can not tell them what not to do from a two sentence question that didn’t even mention a question about a business plan (of format). I also added that BLL was rude because of several other replies of his that I had read in other posts where it seemed like 7 out of 10 times there was a reply that people took offense to. I said that I did appreciate that BLL took the time to try and explain his opinion, but like I said that was not my question in the beginning.

There are many intelligent investors on this website, including BLL, Dave, and I am sure you are as well. I do appreciate all this great info I can refer to and responses that everyone gets. What I do not appreciate is people talking down to new investors or criticizing their idea or plan when they know nothing about them. I mean the first question I asked was torn apart and it wasn’t even relevant to my question. I have seen this many times on this website. Is it too much to ask to get a question answered in a professional manner that is relevant to the question? It is like I am back in college where everyone is competing and thinks they are always right.
Dan

19

Dan,

When I go back to the beginning of this thread, I see BLL’s very first response to your question. Let me quote in its entirety.

There are no pros to adding your father. The LLC is also a waste unless you plan to have someone else manage the property.

How is his response NOT about your original question. It appears to me that his response was succinct and to the point.

Since you opened your question by saying that you were planning to establish an LLC, BLL advised that your LLC could be a waste of money if your investment strategy involves self-managing your properties.

From that point on, you got defensive and refused to discuss the merits of your plan and the business necessity of an LLC. Instead, you kept telling us that you trust the advice you were getting. You did not want to hear anything that contradicted what you were told.

You closed your mind and dismissed BLL as just some random poster who obviously did not know what he was talking about. You have nothing to complain about here. I suspect you will further your education in the school of hard knocks, and only then, will you realize that BLL’s warnings were right on if you had only been willing to listen.