Filling a form is about 1% of the work. The benefit of an LLC is in the operating agreement, not the statute that authorizes the LLC. You need a VERY qualified person to make sure yours will work the way you need and there are maybe a handful of people in the US that actually have more than a basic understanding of the issues involved. Cookie cutter agreements are worse than useless because you have wasted money on something that will not survive a determined creditor attack.
LLCs don’t scare creditors away or stop lawyers from suing. They know most are not set up or run properly and there are many established theories to pierce them. It only takes an $11,000 unpaid judgement to force an involuntary bankruptcy proceeding where many LLC protections don’t apply unless the operating agreement is drafted with particular clauses. One litmus test to separate good planners from bad is a discussion of executory agreements. If the person can’t tell you the difference between an executory and non-executory agreement and why it’s important, move on to someone who can.
There are few reasons to only use attorneys. Because the law isn’t really enforced, I’ll ignore the fact that drafting LLC operating agreements is considered the practice of law and doing so without a law license is the unauthorized practice of law. Creditors are starting to claim civil fraud between the accountant and the property owner. When the account finds out his insurance does not cover this action, there is a strong incentive to turn over your documents to the creditor and even testify against you in exchange for dropping the accountant from the suit. An attorney cannot be forced to turn over privileged material or testify against a client. Accountants don’t have experience attacking or defending business entities in court. They don’t know creditor/debtor law. Judges and juries do what they think is right. An experienced attorney will know what works and what doesn’t in court. Accountants and lawyers who don’t spend time in a court room don’t have that experience and have to rely on case law or others for an opinion. By the time great strategies make it in books and seminars, it’s old news. The best stuff is discussed among friends and bars and on the golf course. (A good example of this situation is the Private Annuity Trust). Creditor attorneys attend AP seminars and buy AP programs. Once they figure out how to beat it once, they can beat it every time.
I wish there was an easy way to find a qualified person, but there isn’t. Most of the really good planners focus on high worth individuals and charge over 10K for simple plans. There are too many people with a great pitch that sell junk. You won’t know until the plan fails and the planner is long gone. There are many good books that describe how LLCs and other entities work and I tell people to educate themselves before blindly putting their trust in an expert. Developing a good BS detector can help.
The realty is that insurance will most likely pay any judgement or settlement. By the time your assets are to the point where sophisticated planning is necessary, you will probably have the cash to retain one of the top planners who can draft a plan for you.
I think you make some good points. But here are some additional items to consider as well:
My experience in working with attorneys is that (excepting guys who practice tax exclusively) they rarely understand the tax aspects of the choice of the entity decision. I feel like I’ve largely educated them by now, but a few years ago, most of the guys in my area (Redmond, WA) often didn’t know that an LLC could be treated as a C corp or S corp.
As you must know, many (most?) attorneys don’t provide a great customized solution for small business or real estate clients needing an economical new LLC or corporation. Instead the operating agreement is canned with the blanks filled in by the paralegal. Or the new, wet-behind-the-ears associate.
Sometimes people can’t afford to spend, e.g., $2K or $10K or whaver on a new corporation or LLC. Even if the work is top-shelf… In that situation, do you really want to say the person shouldn’t do it themselves? Just food for your thoughts… Not trying to stir up trouble.
And to answer the other question about how a real estate investor finds a good accountant, well, I’ll provide this (equally candid) answer… I think that real estate investors (at least in my area) are tough for good CPAs to serve. Typically, the clients don’t have much cash flow to pay for the services as they’re needed…futhermore, they often don’t pay much tax anyway…and to top it all off, they often don’t have very good accounting systems which means they’re often asking the accountant not only to prepare a tax return and answer questions but also to do a year’s worth of bookkeeping … all for a cheap price during tax season when a good tax person’s time may be worth $300, $400 or $500 an hour.
Accordingly, I would think if you’re a real estate investor that what you want to do is work with a CPA who’s totally tuned his or her practice to serve real estate investors (and has figured out how to do good $400 returns or whatever)… or work with a bookkeeper who can also do simple 1065 partnership returns, 1040 returns with real estate components, etc.
I actually agree with you more than you think. Most lawyers are clueless when it comes to taxation (except for the tax specialists) and many of the guys doing LLCs are clueless when it comes to actually working with LLCs in court. Asset protection and LLCs are the new hot topic and every one wants a piece of that action. Many of them offer the service to make a quick buck without knowing how the law actually works in court. The internet makes it very easy to reach a wide audience and facilitate document mill preparation without actually seeing clients. Proper LLC planning is a combination of contract law, entity structuring, and debot/creditor law mixed in with a little bit of litigation experience and alot of taxation. Very few people know these topics well and it’s a shame most people can’t tell good planning from bad.
I think a bad plan is better than no plan and a cheapo, cookie cutter LLC OA is better than nothing. People just need to know that if by some extremley remote chance there is a personal judgement of several million dollars rendered against that them, the LLC won’t survive. What I see in practice is that people think the LLC is some kind of magic armor that makes creditors go away. It doesn’t. It doesn’t prevent lawsuits. It doesn’t add credability. It doesn’t provide protection without alot of effort. The trial guys I know have several investigators on staff to find assets. When they see an LLC or a trust, they know to dig deeper and chances are the LLC can be pierced because the vast majority are not run properly. Is the DIY stuff worth it relative to doing nothing? I tend to think the money is better spent on insurance since most cases are settled for the insurance limits anyway. I would recommend an inexpensive planner who is willing to answer questions and explain things over a DIY kit. I will say that I don’t think there is a right answer. Only an answer that works for the individual. If a bad LLC or DIY kit makes a person sleep better at night, that’s worth something. Personally, I would rather have nothing than something done incorrectly. Opinions vary and folks have to do what makes them feel comfortable.
I think most RE investors, especially LLs, are cheap. They expect top service for peanuts. I have no problem paying $400 or 500/hour. I just expect value for my money. Specifically, the services rendered should make or save money relative to the cost. What I won’t do is pay those rates to have my taxes done in the most conservative way. Have you ever heard of Al Aeilo? He has a tax program designed for real estate investors and many investors are giving a copy to their tax guys to use to prepare their taxes. It’s the closest thing to a magic bullet for taxes wrt to a typical real estate investor that I have seen.
I have to give you credit for the record keeping comment. Too many people let that part of the business slide, usually to their detriment. I always tell people to put systems in place to save them time and help their CPAs and attorneys. People should engage their tax guy through out the year to help with planning. Have you seen Mike Butler’s programs that integrate with QuickBooks? I just bought a copy at the last MR LL convention. I usually buy stuff just to see if these guys know what they are doing. So far I like it, but I haven’t really gone into great detail.
No worries about being blunt. I appreciate the dialgue. We are all hear to learn.
At my local REI meeting the other night, an attorney had a table set up about LLCs, trusts, etc. I spoke to him about LLCs and he mentioned how most attorneys do NOT know much about LLCs and the newbie attorneys prepare them.
This guy and his partners to 50 LLCs / month and are RE investors. I don’t have the sheet with me that explains what all they do to set up your LLC but it seemed to me that this guy knew what he was talking about. But then again, when you’re fairly ignorant about the subject, it isn’t easy to separate the facts from the fluff.
Just a general comment about the “then you can go after your attorney” remark…
Whenever some client or prospective client makes a comment like this to me, I terminate the relationship.
I figure that if someone’s reflexive position is, “and then, if things don’t work out, I can sue the CPA or attorney…” they aren’t worth the risk.
Example: I had a guy call me a while back, ask me a bunch of questions and then decide he wanted to use my services. I said “welcome aboard.” A few minutes later he called back and said, “Oh, I forgot to ask, what’s the limit on your malpractice insurance”?
The dork was surprised my response was, "Hey buddy, no way I’m going to accept a client who asks that question… find somebody else. "
Wow, you guys lost me.
Your responses are far too advanced for me to even understand at this point. I’m still new so I just formed the LLC to use when I decide to buy a property, and also to put everything business-related under the LLC and not my personal name.
Basically, I formed the LLC online and I received all the documents and stuff.
Now I plan to take it all to a CPA and discuss everything with him and ask him if I made any mistakes or what not.
Just one question remains; if I made a mistake in forming the LLC, would the CPA be able to correct it or have it edited? I guess I’ll find out when I speak to him.
Your well-knowledged responses are truly appreciated and are invaluable to this forum.
Seattle - I made those comments because of what you guys were saying earlier. If I lose everything because my “LLC” isn’t setup correctly, I deserve to take everything from my lawyer. That’s why you pay a thousand bucks+ to have one formed by them, instead of paying 100 bucks to do it yourself.
I think you need to consider the insurance element as part of the price then.
E.g., you can’t look at your attorney’s or accountant’s hourly rate and then say (as I’ve heard people say here), “I don’t want to pay $200 or $300 a hour.”
One isn’t in this situation just paying for the hours… one’s paying the insurance.
BTW, I think most professionals do price their services with an eye on the risk. I had a guy negotiate me into a $500 tax return last year… telling me it was really simple return… almost just a W-2.
And then I got the guys return and it was a multistate return with a W-2 well into eight digits. His combined federal and state income tax bill was millions. I was really ticked. I told him I wouldn’t work with him again. Too much risk for $500.
An LLC operating agreement that does not cover every possible situation is not malpractice. Most are pierced, not by an inherent flaw in the agreement, but by actions on part of the member-manager. The member creates a liability and the creditor uses one of the many theories to bypass the LLC protections. A member who takes no part in the management of the LLC faces little risk from the operation of the LLC. His liability from his own actions is completely different.
It is also not the attorney’s job to hold your hand through the operation of a business. If you are sophisticated enough to set up an LLC, then you should know how to run it. People get LLCs and don’t bother to transfer assets, don’t hold meetings, and don’t maintain records, etc. That’s not the attorney’s fault. It takes several entities to shield all the possible angles of creditor attacks. Each entity needs its own books, records, tax reporting, etc and that can get expensive in terms of time and money.
Is there anyone in this group that has used "legalwiz.com " to set up their corp or LLC, it is a DIY course and it is run by an attorney who is also a real estate investor, Bill Bronchick . I’m considering purchasing the course and was looking to see if anyone can give feedback on how easy or how difficult it was to use.
It’s probably OK if you have less than a $1M in net worth. It’s a reasonable price compared to many of the products out there, but I wouldn’t expect more than a basic OA and I wouldn’t expect the LLC to survive the case of an excess judgement.