Can I start my on LLC I am employed by a broker in California but on the side I want to start my own LLC with a friend and start refurbishing 2-4 units and renting them out. Would starting an LLC even be valuable to me for tax purposes??? Please help not sure if I should even create one.
-Mike
Howdy Mike:
A LLC offers no tax advantage. The income is reported and then passes thru to your personal taxes. You may be able to deduct some expenses that may not be deductible as an individual. A partnership agreement will accomplish the same and in my opinion is less reporting stuff to do. You can set up a partnership with hardly any costs.
He TedJr,
What do you mean by partnership agreements. ?
Howdy Sunny:
Just form a partnership. Get an agreement in writing explaining the duties of each partner and the % ownership and other details of the business. You can spend thousands setting this up or write it on notebook paper by hand.
Be careful, in CA i think there’s $800/year (no matter what) fee.
Second post down.
Mike,
The bigger consideration for me is the liability associated with owning rental property. Obviously, in our lawyer-filled society, you don’t need to do anything wrong to be sued (ask me how I know). When you have middle to lower class tenants, many of them want what you have but are too lazy to work for it. They are more than happy to sue you to get it and there are plenty of scumbag lawyers willing to help!
LLC’s are very good at protecting your personal assets and limiting your liability from a particular suit to the assets in the LLC. Therefore, if you’ll be holding a lot of rental properties (or even one), it is very helpful to use LLCs to isolate assets and protect yourself.
I have attended several presentations and seminars on this subject and have completed a couple of courses. The consensus of the experts seems to be that you should divide your rentals into small groups (of 5-10 properties or units) per LLC. Put lower risk rentals in one LLC, moderate risk rentals in another LLC, and high risk rentals in another LLC. The number of LLCs needed would depend on the number of properties you own. By doing it this way, if you are sued in one LLC - you are only risking the assets in that LLC.
Combine this strategy with land trusts and insurance for a layered asset protection system that should protect you from predators.
Partnerships offer absolutely no liability protection (with the exception of some Limited Partnerships). What’s worse, in a general partnership you can be held personally liable for the actions of your partner. If you partner is on the way to the job site and is involved in an auto accident - YOU could be held personally liable! That’s the problem with partnerships. This can be true if you have a partner even if you don’t have a written partnership agreement.
I’d suggest that you get as much education on this subject as you can. Asset and liability protection is an essential part of any successful business.
Disclosure: I am not a lawyer; don’t want to be a lawyer; and don’t even play a lawyer on the internet. The above is not legal or other professional advice and should not be construed as such. If you desire legal or other professional advice, consult a professional. Tax, title, and delivery fees are extra. Caveat Emptor. You get what you pay for. Eanny, Meanny, Miny, Mo!
Mike
Some good food for thought Mike…as usual, thanks for posting this conscientous reply.
The book that I’m now trying to peck away at is:
Wealth Protection…Build and Preserve Your Financial Fortress
by Christopher R. Jarvis, MBA and David B. Mandell, JD, MBA
See if it’s at your library first…
-Mike
Later this month, I’ll be out on one of these:
http://www.boatnerd.com/news/newpictures02/ptregurtha4-02-pb.jpg
Out there, one of the ways we compartmentalize risk is via watertight hatches throughout the ship.
Same approach as which Mike is talking of.
-Mike
DISCLAIMER: This isn’t advice. This is just sharing experience.
I considered and LLC. but since I was new and all my properties were fully mortgaged at this time it did not make sense for liability purposes.
I was able to raise the liability on my homeowners which protects me against liabilites from the properties. I could have bought an umbrella policy for even greater coverage.
My attorney suggested if I were to pay down the mortgages to significant equity or gain large appreciation they should be put in separate llcs to protect each other from liabilites. 10 properties in 1 llc makes all 10 vulnerable to and accident at each 1.
A twist! Now, I jsut sold my primary residence and am renting temporarily. No more homowners liability protection.
I was able to get a renters policy that covered me against lawsuits from the properties. 132 bucks for half a million coverage.
Then there’s more. Some lenders won’t finance an llc. When a property is transferred from the owner to the llc, this may violate the due on sale clause in most conventional mortgages. Now, no mortgage company would need to forclose on a due on sale violation if the mortgage is being paid but it is still their option.
So what do you do? You want the protection of an llc,you pay for it.
So the question is. Do you need the protection? And that is a question for each to answer for themselves.
Jeff
Good add’l advice Jeff.
“My mamma told me…ya betta shop around”
-Mike
Hey allagash! It wasn’t ADVICE… remember??? 
I was relaying my experience. I may be LAIBLE for advice.
Hee hee hee.
Jeff
I mean LIABLE…
k…
-Mike
BTW…nice job on the Puerto Rican deal.
Thanks… more of a gift than a job, eh?
Hi,
I must thank Allagash for his hint on the book Wealth Protection…, and like to invite all of you to feel free, to express your opinion to the question i posted.
I also, must say that the experience posted by Jeffinct was very valuable for me, however i wonder if it is possible to burden a self-property with a junior mortgage/liability favoring a entity ( like a off-shore company, for instance), hiding the equity you have on it.
Sorry by my ignorance, but i m in Europe, and here things could by diferent from your market in the States.
Thanks,
Man,
More I hear about this LLC v/s Partnership v/s Trusts, more i get confused ???
Here is a scenario.
I am trying to buy some lots to build on. I have an IT Company which is established for last five years. I was trying to get loan in company’s name so it does not show up against y personal credit.
Hearing you guys make me think that may be I shouldn’t do that and start a separate company (LLC/TRust blah blah) to do that. My CPA advised me of the same as well.
I don;t like the idea that the work and expenses will go up. On the other hand if I do this within my existing IT Company, revenues will go up and I might be able to benefit from increased turnover etc.
I am confused, would love to hear from the experts
Sunny
thanks guys for all the help learning alot alot.
-mike
A layered asset protection system???
Now this sounds interesting. I have a partner with great credit. I do not have great credit. We are planning on being co-borrowers and then transfering our first property into a trust.
But please tell us more about this layered asset protection system…
:
A multi-layered asset protection plan is one which provides you with multiple defenses against financial predators.
The first line of defense is privacy. This can be accomplished by placing your property into a land trust when you purchase it. The land trust should be set up so that someone you trust with a different last name (such as married daughter or lawyer) is the trustee and an LLC is the beneficial interest (owner of the trust). This makes it more difficult (though certainly not impossible) for someone to find out who ownes a given property.
The next layer of protection is having the LLC be the beneficial interest of the trust. If someone sues the LLC and wins, about the best they can hope for is a “charging order”. This gives the plaintiff the right to receive future distributions from the LLC. The problem for the plaintiff is that the LLC decides to never again have distributions. What’s worse for the plaintiff is that he not only fails to receive any money, he also has to pay taxes on the profits of the LLC that he was entitled to. For this fact alone, may scumbag lawyers won’t bother suing you.
The Final layer of protection is the insurance. If you lose on every other lever, the insurance will compensate the plaintiff and you’ll still have your property.
This is a simple example of a layered asset protection plan.
Mike
What book, kit, or guru can I learn more about this?
Thanks