I am just now getting started in real estate and am planning on starting with wholesaling and moving into flips shortly. Should I set up an LLC now or once I have closed a couple of deals? :help
Set it up when your net worth is at least a few million dollars. Spend your time and money trying to reduce taxes. Taxes destroy more wealth than lawsuits.
Hi,
File a LLC based on your assets and job, if you make good money at work and own your own home, are married and have family? File your LLC now!
It is how you use your LLC that is important to protecting your assets and interests.
There are reputable companies on the internet including legal zoom . com who do LLC filings.
Good Luck,
GR
The problem with an LLC if you are just starting out is that you are the one whose actions are going to cause liability for the LLC. When that’s the case, there is no limited liability. You are personally liable and your wages and personal assets can be used to satisfy the judgment. Your LLC will get liquidated because you were acting on its behalf. There is no real protection if you actively manage the LLC and own it.
Insurance provides a better value and you can insure your net worth up to several million dollars. Remember that most cases settle for the insurance limits and there are very few judgments that exceed a several million dollars.
If you go the legalzoom option, be aware it is a document mill. They produce cookie-cutter documents and make money on quantity, not quality. By quality, I mean taking the time to make sure the operating agreement is tailored to your needs. All this planning is like a parachute. You don’t know if it will work until you pull the cord, but it’s too late to do anything if it doesn’t work. AP planning is the same way. You don’t know if it will work until you get sued and your options become very limited by that point.
Hi,
BLL I have some problems with your responses. First unless your sure of what your writing I believe that you should refrain from writing what is not correct.
First the only reason I have any corporate entity is for protection from other people, in order for me to do something where I cause the liability I actually have to conspire to commit a crime or to purpose to defraud.
Second you are completely protected by the LLC or Corporation provided you operate within excepted guidelines required by law. There are hundreds of thousands of mom and pop companies operating as an LLC in this country with protections and in compliance with the law!
I have always in everything I have ever written within this website advocated the proper use of LLC’s or Corporations and liability insurance, workers comp insurance, officers and directors insurance, errors and omissions insurance, theft insurance, environmental liability insurance, non performance insurance, umbrella insurance, auto insurance, equipment insurance, etc.
Do you know that insurance has terms and conditions and has a written set of exclusions, then you still are liable because as was pointed out to me, if I want you I file a lawsuit for twice the gross aggregate of your policy.
Then your on the hook, gotcha!!!
In any state you have to file the legal entity (LLC, S-Corp, C-Corp, 501-C3, etc) You act like you can not read and revise what is in the package, you can go back after filing and have an attorney rewrite any part of the bylaws, operating agreement or management agreement and have it ratified to your company.
Why would I go pay exorbinate fee’s to do the basic filing when I can get the exact same thing from any legitimate company that files corporations.
And the bylaws, operating or management agreement supplies with the package is approved by the state attorney and state bar in the specific state.
Asset protection and risk management is very important to investors and is the first line of defense when a lawsuit is filed, no it is not absolutely secure but it is much better than nothing.
When I discussed this with one of my attorneys today, he said he would much rather see people with any entity filed reguardless of what the bylaws, operating or management agreement said as most lawsuits never go to trial and I would much rather see my clients company name on a lawsuit than see a lawsuit against someone’s personal name.
Just having the entity is 98% of the protection, if you don’t have it you can’t have the protection. Most people do not want to go through the litigation, depisitions, discovery, and the long drawn out delayed process.
According to my attorney and I agree because I just looked at my entities, the bylaws I have for California are different from the bylaws I was issued in Nevada and both are different from Delaware and all three different from Wyoming, etc. Every single set of bylaws in my posession are different than every other state. (Alaska, Washington, Oregon, California, Nevada, Utah, Arizona, New Mexico, Texas, Missouri, Oklahoma, Colorado, Idaho, Montana, Texas, Tennessee, Virginia, Delaware, Wyoming, Florida, Georgia, North Carolina and Pensylvania. Every one of the bylaws issued by the basic incorporation company are different in every state)
My attorney said the bylaws, operating agreement and management agreement issued in any state are approved by the state attorney and state bar association and are issued according to that states law.
I mean no disrespect but the ideas as submitted to other investors especially those with less experience than us need to at least guide these people to understanding the best thing for them.
Obviously we really want to see our fellow investors seek an attorney and talk to an accountant about orginizing there respectful businesses.
Just a little information BLL, most documents and agreements made by attorney’s today although partially customized come from a software program! Don’t think even for a minute that your attorney actually poured over the JURIS-PRUDENCE books in his law library spending hundreds of hours reviewing case law and torts to define whether he should use the word “Either” or “Or” in your companies agreement to get you the most effective wording.
It’s just not happening!!
GR
I suggest you do the same. I have some serious problems with some of your comments. What I am saying is correct or I wouldn’t say it.
No crime or fraud is needed to impose personal liability for actions taken on behalf of an entity.
Where is the fraud or crime in the following actions where someone is injured?
failure to maintain an egress in safe condition and someone trips
building a deck not to code and it collapses
improperly maintaining a heating system that causes CO poisoning
running a red light while on the way back from Home Depot and causing an accident
Each of these has no element of fraud or a crime, but the individual responsible is personally liable along with the owner of the property. An LLC or entity doesn’t act. Someone acts on its behalf. When that someone does something to cause an injury, the person is personally responsible along with the entity.
The law doesn’t protect you from your personal actions. People assume the protection covers personal liability while acting on behalf of the entity. That is not correct. You are always personally liable for your own personal actions. That is how LLCs are pierced for small time operators. The owners, managers, employees, etc. are the same person or group of persons. Anything they do in the name of the business that causes an injury creates personally liability. Some states do have statutory protections for LLC members where they are not personally liable for the actions of other managers, etc. Only the LLC is. That is why I recommend an LLC for a person with partners regardless of net worth.
I never implied otherwise.
I am aware of insurance exclusions. Filing a lawsuit doesn’t mean you will win. If the case is meritless, your attorney will get it dismissed or prevail. If you choose to settle, it is within the insurance limits. Plaintiff’s attorneys aren’t looking for a fight. They want quick cash. My point to insurance being sufficient is that there are very few judgments that exceed a few million dollars. Insurance for that amount is roughly a few hundred dollars a year. That means your net worth is covered by insurance for much less than maintaining entities. Assuming the plaintiff actually prevails and there is an excess judgment, entities may help, but bankruptcy is a stronger response and there is a good chance the plaintiff’s attorney will try to force you into involuntary bankruptcy anyway where it is easier to collect what is owed.
That is correct, but why go through the hassle of first step? Why not go directly to the attorney who will draft them correctly from the start? The attorney is going to use a template anyway, but a good one will have court experience and keep up with changes to the law that will allow him to customize your documents for better protection. The document mills don’t send out updates to their clients when the law changes, but a competent attorney will.
You shouldn’t pay for basic filing, but you should use an attorney to draft the important documents. The problem is people don’t do the second step. They assume just having the entity is enough. Not true! The operating agreement/bylaws are what gives the entity protection. Single member LLCs are liquidated in bankruptcy because the LLC member used a poorly drafted agreement. That bad case created case law that struck a blow to the use of SMLLC.
That’s like saying having a driver’s license makes you a good driver. At best, the state only validates that the documents comply with the statutory requirements. That doesn’t mean they are actually any good. Here’s an example. Many kits use standard language that says the LLC must distribute funds to members if it can. If a member has a charging order, then the LLC operating agreement actually forces the member to pay the creditor. A good attorney will draft language that takes away the member’s rights or severely limits them while the charging order exists.
The first line of defense is good, ethical business practices. The second is insurance. Asset protection planning is third. Good practices prevent the lawsuit in the first place. Insurance is basically payoff money and it works because the claim is under the limits the vast majority of the time. Asset protection can help force a settlement pre-judgment or limit what is collected post-judgment. It does not prevent lawsuits. It does not make you look more professional. It doesn’t help you win a lawsuit and sometimes can actually hurt. If the plan looks convoluted and you can’t explain why you did what you did, judges and juries have a tendency to assume you are up to no good. Part of asset protection planning is using an attorney who has actual courtroom experience learning what works and what doesn’t.
Typically, the owners, managers, etc. are sued personally along with the entity. However, the entity is named first. I don’t think it matters, but I don’t feel strongly enough to disagree with your attorney. I do agree that most cases never make it to trial. If the case is meritless, you refuse to settle and they go away. If not, you most likely settle for your insurance limits.
No entity is required even though some say otherwise. I’ll give a few reasons why an entity doesn’t matter. There are actually seminars for collections professionals where they learn how to pierce the corporate veil. The big one, especially small time operators, is failure to maintain the formalities to keep the entity legal. The kits don’t emphasize the need to maintain them and people don’t. The creditors know they have a good chance of piercing.
Assuming a DIY LLC is maintain properly, the debtor member is still subject to a charging order. Her are the charging orders taught in seminars.
No one can take any money out of the LLC unless the creditor approves
The LLC can’t make loans unless the creditor approves
The LLC can’t sell major assets unless the creditor approves
The LLC can’t purchase major assets unless the creditor approves
A receiver is appointed
It is very difficult to run a business under those conditions and you are more likely to settle because of it. That is how the creditors are being taught when it comes to LLCs. Corporations are even easier because the creditor just takes your shares and elects a board of directors who will liquidate the company.
I completely disagree. There is no protection with poorly drafted documents or when formalities are not observed. Having an entity is just the start. Since people don’t want to go through discovery, etc., they will settle for the insurance limits since it’s quick money.
My point is that the VA documents are basically the same for VA clients of the company that created them, but everyone is different and a competent attorney will make sure these standard documents are appropriate for the individual or modify them so that they are. Another thing to consider is that an entity for renting should be different from an entity for wholesaling should be different for an entity for running a business should be different for an entity owning aircraft.
What does this mean? They are well drafted and that they will work as expected in a lawsuit or does it mean that they simply comply with the statutory requirements? I doubt the state or bar association actually reviews the documents for sound legal planning. Again, I give the example of the driver’s license. It makes you legally able to drive a car. It doesn’t make you a good driver.
That is what I am doing. I don’t advise a newbie to set up an entity immediately because it will cost them much more than they will gain. Some states require an attorney to represent an entity in court. They will have a harder time with financing. They the annual fee and the registered agent fee and must spend the time to maintain the formalities. All for something that is going to really protect them in the end. The money is better spent building the business and minimizing taxes.
I have always advocating having the personal attorney and tax expert retain one of the competent national planners for advice. Many providers don’t offer advice. They execute instructions. You say you want an LLC. They say yes. They don’t go through the process to determine if the LLC is actually appropriate for you.
They do both. A program does generate the documents, but competent attorneys spend time reviewing case law to educate themselves and keep up with new cases to make changes as necessary. They modify these documents as needed for each client. Relying solely on the program does a disservice to the client. The attorney won’t know what works and what doesn’t until there is an actual case. An attorney who actively defends and attacks plans knows what works in the real world. You never hear about a settlement or an avoid lawsuit. These strategies never make into these generally available documents because only the attorney involved knows them.
Hi,
There are two points: One is how a Corporate entity is breached called breaking the veil, and second is the purposeful neglect of fire / life / safety issues that cause an accident which includes bodily injury or death basically in violation of state and federal laws.
In order to break the corporate veil a corporation’s board of directors or officers must conspire on purpose to commit fraud or to undertake practices that intentionally violate state and federal laws.
Stating that we as investors are nieve and uneducated and that we would purposely fail to maintain the ingress / egress of a property is simple unfounded, it implies that we have no concept of inspections or proper management.
To imply that we are going to purposely build a deck without permits and not in compliance is unfounded, as it incinuates that we investors have no care or concern for the public and would then purpose to cause injury or death. This implies that we would spend capital dollars with no reguard for engineering or structural soundness and theoretically makes us slumlords.
The statement that anyone would purpose to leave a HVAC system unmaintained and unchecked and purposely cause a leak of Co2 to poison people is insane, we as investors are not stupid and we certainly would not purpose to cause poisoning to anyone.
From the investors viewpoint you would have to purpose to any of these things in order to be found neglegent and break the veil. And to imply that we as investors do no maintence, use shoty workmanship, draw no permits and fail to maintain equipment is unfounded.
The small percentage of violations of these types of code and compliance violations are extremely small in comparison to compident investors.
If we are so positively sure we are commiting personal liability, business would cease to exist, we would have no more jobs, no more need to be landlords or own property because no one would have the ability to pay because the risk of hiring or partnering with someone is so great.
If we went around causing harm to others, your pointing out personal liability would end everything, it stops the world and we no longer exist to invest in real estate or do anything else, it would mean if there were significant percentages of people causing harm to others that all of the world could not work and could not earn a living, it insinuates that the world is a walking time bomb waiting for the day everyone sues everybody else. The odds of this happening are so small it was not worth writing! It implies there again that we investors are looking for someone to harm!
How much liability do you have if you only own 1% of any entity???
Most states have protections for limited partners (MEMBERS) of an LLC.
This explanation below comes directly from one of my attorney’s websites!
WHAT’S AN LLC?
The Limited Liability Company (“LLC”) is a hybrid entity that is very flexible and, depending on how many owners (known as “Members”) and what such Members elect to do, may be taxed as a partnership or corporation, if it has multiple Members, or as a sole proprietorship, if it has only one member, while providing limited liability protection for all of its Members. For federal tax purposes, an LLC, like a partnership or sole proprietorship, is a pass-through entity; thus, its income and losses are taxed only at the member level. However, all members of an LLC, like the shareholders of an S corporation, have limited liability for the debts and claims against the LLC. No member will be burdened with the personal liability.
The main advantage of the LLC is that it is not burdened with the ownership restrictions imposed on a small business corporation (also known as a Subchapter S Corporation). An LLC may have more than 100 Members or as few as one. Its interests may be held by corporations, partnerships, Non Resident Aliens, trusts, pension plans and charitable organizations; the LLC may make special allocations, thereby avoiding the single class of stock requirement applicable to an S corporation; and it may own more than 80% of the stock of a corporation and, therefore, may be a member of an affiliated group.
The Members of the LLC become owners of the Company by putting capital (making a “Capital Contribution”) into the Company in exchange for a Membership Interest, which is expressed as a percentage. Typically, the allocation of profits and losses are proportionate to the Membership Interest. The Capital Contribution can be money, real estate, equipment, future service (“sweat equity”) etc., and if it is something other than money, it should be assigned a value agreed upon by the Members. For example, Bill and Mike want to set up a company to operate a retail athletic goods store. Bill puts in $51,000 and Mike will work 60 hours next year managing the store and his sweat equity will have an agreed upon value of $49,000
The LLC is operated by Managers that handle the day-to-day activities of the LLC. The Managers may be all of the Members, some of the Members, or it may even be managed by a person or entity that has no ownership interest in the company. Since such a non-Member Manager will not share in the profits and losses, perhaps they will be paid a salary or commission as agreed upon in a Management Agreement.
WHAT’S A DUAL CLASS LLC?
The Dual Class LLC is a special type of LLC that follows proposed IRS regulations which allow an LLC to be deemed analogous to a limited partnership for Federal Income Tax purposes. The Dual Class LLC is structured to admit both active, management-providing members (“General Members”) in addition to more passive, capital-contributing members (“Limited Members”). In doing so, the members/owners acting solely as limited partners are not subject to the Self Employment (“SE”) tax.
Here’s how it works. Dual Class LLC is divided as follows:
Class A General Member Units: The smaller manager class receives a priority preferred return of income (for example, a management or sales fee arrangement) that is contingent on the profitability of the LLC. As such, it may not be a fixed compensation amount or it will constitute a guaranteed amount, which is prohibited.
Class B Limited Member Units: This portion of the LLC membership interests is the cash-contributing members’ interest and is structured as a non-manager class qualifying for limited partner status. This class receives a cumulative preferred-priority return of profits based on their unreturned capital contributions, whereas the smaller active manager class would not.
For example, assume a Dual Class LLC with three Members: Perry Manson and Samuel Adamson are Limited Members initially investing $50,000 each into the Dual Class LLC and Angela Dickeyson is the General Member and she is putting in “sweat equity” (future services) with an agreed-upon value of $50,000 over the course of two years. To the extent that Angela is providing services to the Dual Class LLC, she will be subject to the SE tax while Perry and Samuel will not be.
What is a corporation?
A corporation is a legal entity that is granted certain powers by the state. It is owned by shareholders who share in the profits and losses of the corporation. It is guided by directors that act sort of like a legislature and decide important business decisions on a periodic basis. These decisions are carried out by the president of the corporation and the other officers such as the secretary and treasurer. There are many advantages to incorporating.
When you incorporate, you are protecting yourself from personal liability. You will also be able to immediately take advantage of the tax system. Incorporating enables you to make use of a marketing framework and this in turn makes it a lot easier to raise capital & establish corporate credit. A Corporation may also take advantage of state laws that grant it privacy. Certain states allow a Corporation to be set up such that the shareholders remain anonymous, and many times, the same anonymity can be accomplished for officers, or directors. In most states, the officers and directors are disclosed, however, shareholders remain anonymous. Finally, a corporate structure can result in an easier transfer of ownership when it comes to various assets.
The most important reason to incorporate is to protect yourself from personal liability. When you incorporate, you are forming a legal entity that is separate from yourself as an individual. The Corporation has powers vested upon it that allows it to make all the decisions that an individual may make. For example, the Corporation may enter into leases, the Corporation may borrow money, it may buy goods and services on credit, and in all cases you are not personally liable for the transaction. If a problem arises, the only recourse would be against the Corporation, similarly, if anyone were to ever file a lawsuit for an action arising out of the business of the Corporation, that party would not be able to go after your personal assets such as your home, or car or boat etc., as long as you comply with the formalities of a Corporation. Therefore you have the peace of mind knowing that your personal assets are safe.
In a corporate structure you can take what otherwise would be non-deductible personal expenses and turn them into legitimate deductible business expenses. In this area there is really no limit as to what you can accomplish with a little creativity. For example, it is well within reasonable grounds to have your annual corporate meeting of shareholders and directors in a far away “resort city” and deduct the expenses as a corporate expense.
Incorporating enables you to make use of a marketing framework. You have the ability to hold the business out to the public as a Corporation. Corporations are usually viewed as bigger and more powerful operations than say “John Doe down the street”. This is particularly useful when you are trying to attract investors and raise capital so that your company grows. The fact that your business is recognized as a Corporation gives it immediate credibility in the eyes of potential venture capitalists and other providers of funds. This also holds true for establishing or reestablishing credit. If you have had prior credit problems on a personal level, it will not prevent you from establishing good corporate credit once you have completed the incorporation or organizing process.
Privacy is also a great advantage to incorporating. In most states, the shareholders of a Corporation are not disclosed and therefore are not public record. It is possible to set up your Corporation in such a way that your involvement in the corporation is never revealed. This does not hold true if you are filing an assumed name or DBA as a sole proprietor or partnership, wherein the names of the parties are disclosed on the assumed name or fictitious business name statement.
A great benefit of incorporating is the ease of transfer of ownership when it comes to assets owned by the Corporation. For example, if you own real estate, by putting it into the Corporation not only do you protect that asset from your personal creditors but if you needed to transfer that property to someone else, you could do so simply through a private agreement such as a stock transfer agreement, rather than go through a formal real estate closing. The stock transfer agreement would transfer ownership interest in the Corporation from you, to the person you are transferring to, and since the real estate is already a corporate asset, you are effectively transferring your interest in that as well.
This is the end of the information I copied and pasted from one of my attorney’s websites.
Your assuming that plaintiffs will settle and agree to mitigate the case and that the insurance company is actually going to pay when a verdict is handed down vs filing for appeals. A case between parties with substancial net worth over one million can go on for years doing depositions and performing discovery. If you are unincorporated you have the personal stress of being a party potentially for years until a case is settled.
And as a personal party can have your assets frozen, your bank accounts frozen and your ability to live limited to a budget by court order.
Here again if Owners, Managers and Employees were such a big risk we would not have any business, no need for managers and certainly no employees and no need to own or flip real estate.
Bankruptcy is easy for someone who has for example $100k in assets and $150k in debt, but many big investors have millions and millions of dollars of assets and significantly less debt, but why should someone make themselves a personal target when a corporate entity seperates personal from corporate?
Remember even if someone prevails in a lawsuit appeals can drag out any payment for years and has even been known to take a decade or longer.
The reason I do not ask my attorney to make any of our filings is because the attorneys charge anywhere between $500 and $2000 per hour. I can pay an employee to sit down and make initial filings for significantly less per hour. The corporate name reservation, filing, and corporate kit have to be done prior to an attorney writing or ammending the bylaws, operating agreement or management agreement and it is senseless to pay large amount of money for something that can be accomplished cheaply online.
There is federal and state case law, but these case laws very from state to state, I never use a single member LLC, however I do not advocate anyone owning more than 1% of any entity, and in certain circumstances owning no ownership of an entity is desired.
If the bylaws, management agreement or operating agreement meet all the statuary requirements and in most lawsuits as you stated are settled then for someone with almost no assets, but a good job and family; would operating under standard template created documents be unusual.
By your own admissions settlement is likely and the odds of a lawsuit being filed let alone going to trial are slim.
If your a member of an LLC with 1% of ownership, and the majority members are going to defend there interests in court it is unlikely a judge will issue a charging order against the LLC.
I agree that business should be ethical and founded in solid principles.
I think sometimes the enity can prevent lawsuits because only the most gregerious will be filed, no lawfirm wants to take a case that a larger, financially sound corporation can potentially drag out, most cases are determined by there merits and if the odds are against settling a lot of attorneys do not want to take on long expensive cases pro bono and most clients can not afford to support the cost’s of a long drawn out case.
And if you ever want to go public, raise money through a debt or equity offer, or deal with government contracts you have to be incorporated. And yes being incorporated raises your level of sophistication beyond the mom and pop business level.
Any state court can only hear cases involving parties within the state, observing a convuluted asset protection program involving corporate owner and management entities from other states are beyond reproach in a state court, and provided the corporate entity from another state is in good standing ownership of for example 97% must be honored in the litigating state.
Indemnification agreements along with errors and omissions and officers and directors insurance protect officers and directors from personal liability unless a officer or director purposes to defraud or make operating decisions outside of state and federal law.
Maintaining the corporate entity was not part of the original discussion, it was assumed that a investor buying 20 plus properties would either understand the maintence of a corporate entity or seek a consultant or legal professional for advice and education.
GR
this thread is like so many others about this stuff.
dude - you have no assets to protect most likely. you’re “just getting started” - if you own a home or whatever - then be careful with what you do and how you manage what you buy. if you’re wholesaling - then forget about an LLC - you don’t need one. I don’t care what anyone in here says - if you’re actually going to wholesale a deal or deals - think about this for a second - you’re never actually goign to own anything other than a contract. a title or deed will never be in your name. and if you do them straight up with some money down - if the deal doesn’t work out - all you’re liable for is your down payment.
of course verify everyting with an attorney blah blah blah -
but please - don’t ask anymore questions about “asset protection” - it’s a joke.
now if you’re buying and rehabing or doing the rental thing - in my opinion - once you’ve got an investment property - that you own - it’s important to have that owned by an entity AND for extra protection - you probably should have insurance.
that’s it. simple.
I suggest Nolo books to get you started. Rent them in the library for free.
A couple other points to keep in mind:
- It is difficult to transfer a mortgage from your name to an entity. This is due to the “sale on transfer” clause that is in most mortgages. Some people still transfer their deeds to their company and hope the mortgage company doesn’t call the debt, however, I wouldn’t recommend doing this.
- If you do set up an entity before you purchase properties, keep in mind that it will be much more difficult to obtain a loan. Also, expect a higher interest rate.
I would also recommend the Nolo books.
If you own your own home, it should already be protected from creditors in many states, if you claimed homestead.
FL and TX are the only the states with meaningful homesteads. MA is close, but many offer very small amounts.
Good point, I guess I take it for granted because I live in Fla. But the OP should still check what his state’s law is.