The following example will be used for the questions I have regarding entity structuring and setup. I will be using an LLC, single member, unless I hear something better. Any advice or comments are greatly appreciated. I am in Michigan, by the way.
I am projecting to do between 6-10 (and maybe more) sub 2 deals this year. I want to set up my entities and business structure correctly, right from the start. NOTE…the questions are only for sub 2 deals. Long term buy and hold, I will ask about when the need arises. The properties I buy sub 2 will be short term deals of approximately 2-3 years. Some important things I need to know are as follows:
How many properties, or how much property value/equity is advised to have in each LLC?
I have heard mention of “parent” and “child” LLC’s, does anyone know where I can research them, or have links to posts about them? I searched and didn’t find much.
How will I pay myself without being taxed to death, and also without creating any problems for the LLC structure? Also, if I have multiple LLC’s as I grow, how will I properly pay for things such as advertising and supplies which are common to multiple entities?
I am wanting to have this done right, but at the same time, I don’t want to spend thousands of dollars right now. I have seen some courses, such as Bill Bronchicks LLC course, which seems pretty detailed, and includes state specific forms. I hear almost everything he has is pretty good, but is it ok to start forming LLC’s this way, with a course? I know it is not all that hard to form an LLC in Michigan.
Basically, I am trying to determine the best, and most cost effective way to start. I have a certain budget available, and I want to save as much for marketing and advertising as possible.
Any help or advise to any of the above is greatly appreciated. If anyone has used Bronchicks LLC course, or any others, I would like to hear it. If I can do it without INITIALLY using an attorney or CPA, I would like to because of my initial budget restraints. But I don’t want to be “cheap” in the wrong areas, and have it cost me later. I mainly want to set this up correctly right from the start. And I also want to know how to proceed as I get close to the 10 properties that I am projecting to have. Thanks in advance for any help.
Bill Bronchick’s materials tell you to use an S-Corp for active income activities and save the LLC for passive income activities.
The buy and sell strategy you propose is an active income activity. The S-Corp would give you the business platform to take business overhead expenses that are not directly attributed to a specific property.
In your strategy, I suppose you would not need to worry too much about having too much equity in your properties. You are doing subject to deals, getting in and getting out of each property within two years, right? Aren’t subject to deals usually no equity or low equity deals? Would six deals per year for the first two years, with little or no equity in each property, let you exceed some equity threshhold you may set for your business?
The above is correct, the average deal would have about 10-15% equity, give or take, which in my area (Metro Detroit) would be…to pick an average…about $15K. I am basically looking for a very rough dollar figure to allow in each LLC, without worrying about potential ambulance chasers. I will not live in fear of lawsuits, but I do want to be protected. I will take title to my properties in an LLC. But I don’t want to put too many in any LLC.
The money I pay myself will come initially from the down payment I get from my buyers when they buy via a land contract. I don’t need much money for myself right away, if that matters. The things I said regarding the common business expenses isn’t big at this point, but will grow as I do.
Maybe I am overthinking this, instead of keeping it simple. I just want to protect myself, and at the same time as I am looking at the present, I still want to be prepared for the future as far as how I set everything up. Initially, I will set up an LLC to take title to my properties. The main thing is I want it done correctly and cost effective. Thanks for the response Dave.
Remember, Tony. Your LLC will protect your personal assets, but not your property which is still partitionable and subject to liens and encumbrances. Peace.
There are no significant differences between LLC and S/C Corp with regard to taxes UNTIL you are making a LOT of money. At this point, the plan changes.
There ARE significant differences between the amount of administrative hassle required: Corps require annual meetings, resolutions to buy things etc etc. lots more paperwork than an LLC.
There are MAJOR differences between LLC and Corp with regard to asset protection. These are general guidelines that apply in TX and NV, I would assume most states to be similar, but that’s the disclaimer.
Both entity types effectively protect you personally from liability arising from within the entity (landlord gets sued).
However the difference is what happens to the entity if you personally are liable (you rear-end someone in your Pinto)
Ownership of corporate stock is an “investment” whether it’s IBM or Joe’s Real Estate Co. Investments can be ordered transferred to satisfy a judgement in court. This would make your adversary owner of your corporation and all the assets it owns and controls.
Ownership interest in an LLC is considered “personal property”. as such it is not available to satisfy judgements, effectively isolating your company from your personal liabilities. A very significant difference.
And at less than $500 to set up an LLC, it’s cheap insurance.
It’s hard to cover all the details in a forum format, but let me know if you have any more questions.