I am looking into setting up an LLC to do future business. I have heard that it is better to use and LLC when buying properties to protect oneself from future liabilities. Can you provide some feedback regarding this?
-who do I have to see to set up an LLC?
-what is the cost of setting one up?
-what are the benefits/disadvantages of doing business under an LLC?
-can I use an LLC for all real estate transactions?
Thanks in advance for answering these and any other issues that may be important!
Nick,
First, let me say that I’m new to this and still learning. That being said, I did set up an LLC prior to purchasing my first rental property. I’ll try to provide you some info on what I’ve learned so far.
There are many different ways to provide varying degrees of asset protection and/or anonymity for real estate deals. An LLC is supposed to limit your liability if something goes wrong. Presumably, your liability should be limited to the assets held by the LLC if you are sued. Also realize the opposing lawyer may try to “pierce the corporate veil” of your LLC and try to make you personally responsible for the damages in the case. The piercing of the corporate veil means they would be able to bypass the protection of the LLC and your personal assets (home of residence, cars, IRAs, etc) would also be up for grabs. One of the easiest ways to have these problems is to “commingle funds.” If you set up an LLC, set up a separate business checking acct. in the name of the LLC. Use this account for ALL business transactions…no matter how big or small. If you are paying personal bills out of your business account OR paying business bills out of your personal account, you are leaving your personal assets wide open for the taking.
A couple ways to have some degree of anonymity could be using a Land Trust or “DBA.” DBA means “doing business as.” It doesn’t provide any asset protection, but you’ll be using the DBA name on paperwork instead of your personal name.
There are other ways of asset protection. Some people combine some of these items for better protection.
To set up an LLC, check with your Secretary of State Office. They will handle the filing and matters related to small business. There are numerous companies online who will “set up” your LLC for you, but from my experience they simply get the applicable state forms filled out for you and charge a couple hundred dollars for doing so. I used one of these companies and would not recommend them to anyone. While I was able to talk with someone over the phone to answer some of my questions, they really don’t provide much else besides filling out your paperwork. I would strongly suggest you read up everything you can on this board regarding LLCs and other forms of asset protection. If you find you want to form an LLC, just fill out the paperwork yourself and pay the state fees. That will save you some money.
Different states have different fees for both establishing the LLC and also a yearly fee for operating the LLC. Here’s one of my previous posts with a link to a website that shows the different state fees:
You can use the following link to view LLC fees by state:
http://www.bizfilings.com/products/statefees.asp
For an LLC, you’re concerned with the first two columns. The second column is the filing fee for the initial formation of the LLC. The other is the annual renewal fee. You’ll see some states have very high filing fees. You will need to file the LLC in the state you intend to do business. In addition, you will need to have a registered agent in that state. The registered agent is someone who will be able to have any legal documents mailed to them at a legal address in that state. Don’t just go off of LLC fees for deciding where to do business. I do business in IL which you can see has a very high filing fee. The flip side is that property values in my area are very low and make it very afforable to buy real estate.
I believe one of the benefits of an LLC is to separate your business from your personal assets. You will have all of your transactions done from a business account…makes it easier to see what money is coming in and going out for your business (rather than everything being done from your regular personal checking account). Some disadvantages would be the cost in setting it up and maintaining the LLC & some more paperwork involved.
You can use the LLC for real estate transactions, but you will likely have to personally guarantee the loan with your signature. Don’t confuse this guarantee with putting your personal assets at risk. By this guarantee, you are simply telling the bank you will ensure the payments will be made.
View your LLC as a separate entity that you work for. When you set up the LLC, you can make an initial contribution of a small amount (for example $100). For other contributions, make a promissory note with interest to the LLC for the additional amount contributed. You can set reasonable loan terms and interest. This will further serve to show you are operating the LLC as a business. This loan is also beneficial in the even you get a judgement against your LLC. If a judgement is levied against your LLC, you can get a charge order for the person that sued you. The charge order can be frustrated and you can still take those loan payments from the business back to you without having to pay the judgement. Also establish an operating agreement for your LLC. While not required from the state (because it is an “internal” document), it will spell out how your LLC is to be run and should address many different issues including the identity of the managers/members, rights and duties of the managers/members, the initial conditions under which the LLC is established, how the LLC will be dissolved, etc.
I hope this gives you an idea of how the process works and some hints on saving a few bucks too.
That is a good overview, especially concerning the commingling of funds. Just be aware that LLCs protect the non-managing members (i. e. owners). They offer no protection to the member-managers and anyone else who actively participates in the operation of the LLC. Owning and running the LLC is about the same from a liability perspective as owning the LLC assets in your own name.
I agree those companies are nothing more than paper filers. One thing they do provide that is nice is pretty binder with nice forms and certificates. Anything more than a few hundred is a rip off since the quality of the operating agreement is very low.
That doesn’t save anything. It is just a waste of time and money. An LLC should be set up by a qualified expert if it is to provide any benefit. The operating agreement is the most important part of the LLC. All the case law where an LLC has failed resulted from a defect in the operating agreement.
The loan will be collapsed if challenged. These type of loan agreements do not protect assets.
The operating agreement is absolutely essential. Again, all LLC failures in court were the result of a poorly drafted operating agreement.
The company I used didn’t even give me an operating agreement. They just told me since it was an “internal document” I could just draft my own. Like I said, they simply filled out the state form for me and mailed it in. The only other thing they did for me was list themselves as my registered agent for six months. Then I found out I had to pay the state $25 to change to my dad as the registered agent. Had I known that going into everything, I would’ve listed him in the beginning. As I said before, my rookie mistake. So that couple hundred dollars is what I meant he’d save by filling out the paperwork himself.
What a rip off!
Thanks, Justin for the info.
One other question…when you register in one state, can you do business in other states under the same LLC? Do you have to set up a special LLC that is valid in multiple states? If you move to another state, do you have to set up another LLC, or “update” the current LLC?
Thanks
Nick
When an LLC operates outside its state of formation, it generally needs to register to do business in every state in which it operates. This process is sometimes referred to as “qualification” and involves filing a Certificate of Authority or other similar document, and getting a business license, in each additional state in which the business will operate. Doing business in a jurisdiction without authority from that state government can result in penalties and other legal implications.
You will see a lot of people on here asking about filing an LLC in Delaware or Nevada because of legal and tax advantages. You can see from above that you’ll still end up paying fees for the state in which you’re doing business.
Your information is wrong. Any transfers made to an LLC set up to protect from future liability are fraudulent and fail when challenged by a creditor.
You can file the paper work yourself or use a service. In any case, you will need a qualified attorney to draft a proper operating agreement.
It varies by state. See Justin’s post. The filing fees range from $40 to $800 and doesn’t include the cost of the attorney who drafts the OA.
An LLC is a tool. Your question is like asking what are the benefits/disadvantages of using a hammer. The answer is it depends on what you want to do. From what you have said, you want lawsuit protection and an LLC doesn’t provide that type of protection the way you plan to use it.
Yes.
Don’t forget taxes. How the LLC will be taxed depends on what type of transactions you plan to do.
Like I said earlier, you are personally responsible for your own actions. If you cause an injury in the name of the LLC, the LLC has no shield for you.