Hey guys. If the only real LLC protection is the the expensive multi-layer type, Is it best spend the money up front or in the future. If in the future, at what point should you do this? I assume that sound business practice,ample insurance and a homestead exemption would be adequate until you have a substantial amount of assets. Any thoughts?
Do it when it makes senses. That means you have something that justifies having an LLC and can afford to hire a qualified expert.
I think that’s where I get a little confused. I’m not sure where I need to be financially before it makes sense to do that. My gut tells me that if I’m making enough money from the properties to pay for it, then I should have enough assets that warrant the protection. Am I on the right track? I’m just looking for a “landmark” that tells me it’s time. Thanx.
phlemboy - I am starting my rental business. I AM NOT AN EXPERT BY ANY MEANS. I decided to open an LLC (here in Arizona it costs only $50 to do the paperwork if you do it yourself). I am now reading about the Operating Agreement. I am going to create one myself. IUHUU!
I know that it may not protect me 100%. However I do feel confident that I can do a decent enough job by myself if I do my research. I am a DYI type of guy… Almost everything I learned in life was by doing… I wrote my own contract when I bought my first house… :O) I even identified errors in my closing statement for my home that saved me a couple hundred dollars. I do my own taxes and they are not that straigthforward… :O) I love to read and I am a very detailed person. I read everything before I sign… You should have seen the closing agent’s face when I started reading all the documents before signing when I closed on my home. :O) Hey - that was my first home. I was excited. I wanted to enjoy every minute of it. I had already taken the day off from work… I had time… :O)
However, I can’t tell you how good it feels when you do something yourself… This is the reason why I do it… It feels good! :O)
I can take the world! (only if I could find a good book that explains me how to do it… :O)
Having said all that - I do believe that you can always learn and will get a better result if you hire someone with experience. My only problem is that I am wired differently - I like to do it myself… :O)
I wish you luck!
Ooops… I got so excited about the DYI stuff that I forgot to give you my 2 cents on your question… Sorry! :O)
I don’t think I need an LLC right now. I agree that you can probably start without one and create one once you have enough assets (I have no idea what would be the magical number/point/threshold here…) And this is the main reason why I want to do it now - I figure that now that I am planning my business I have time to research and open the LLC myself. In the future if I wait until I need one, I will probably not have time to research (because I would need it then) and I would end up having to hire someone to do it…
So my thinking in opening one now:
1 - gives me more privacy than if I use my own name (I know it is not a strong privacy - they can still find my name).
2 - it will help me think about the business as a business.
3 - it will give me a higher level of protection for my other assets than if I used my own name (I know that the veil can be pierced). My wife will do the management herself. And I will try to do some of the maintenance myself.
4 - I will look more professional when approaching a lender with my business plan and loan package.
5 - I can tell my tenants that I work for the Company. I don’t need to tell them I am the owner of the Company here (this is a maybe - it is still a gray area for me because on July 1st I am activating my real estate license. I know I need to disclose that the principal is a realtor on all real estate transactions. Not sure if I need to disclose to my tenants that I am also the owner of the LLC that owns the property. If yes, this will kill my privacy… :O(
6 - I think it will be cool to have documents, business cards, contracts in the name of the company.
7 - I can learn a lot by doing it now when I probably don’t need it. I will have much more knowledge about LLCs by the time that I will need one.
8 - it is cheap if you do it yourself.
I hope the above helps.
Have a good weekend! :O)
I don’t see how you can do a decent job. You don’t know what you don’t know and I’ll bet your research will be mostly internet-based, where 99% of the information is just wrong. There are only about a dozen or so attorneys in the US that have more than a basic understand of the issues involved. It will take years of full time study to even begin to understand the complexity and interdependence of all the issues involved. Here are just a few areas you will need to master: debtor/creditor law, bankruptcy law, tax law, estate planning, corporate governance, business continuity, succession planning, insurance.
LLCs are made and broken in court cases. Without access to case law or a law library, you will never understand what works and what doesn’t. However, whatever you do find won’t help against new vulnerabilities. A perfect example is a recent case where a member of an LLC was held personally liable for LLC debts because he made a simple mistake on a form filed with the government. That is a very common DIY error.
Without trial experience, you won’t know how judges and juries interpret laws. Take the asset protection trusts. Set up properly creditors could never seize assets and these things sold easily. What the gurus didn’t know is that judges would throw the defendants in jail until they paid the creditors. One person is at 15 years and counting. One was held for 6 years before being released. One woman fled the country, but decided to turn herself in because she missed her children. I don’t call living in prison or never seeing my family a success. Everything works in theory. It’s the actual application that matters and that is only learned in court.
That mindset will serve you well, but I think your time will be better spent gaining a basic understanding and hiring a professional to do the actual work. The time you spend learning it yourself could be used to build your business.
How will it feel when you lose everything because your operating agreement was deficient? You won’t know it doesn’t work until it fails and it’s too late to do anything about it at that point. That is not a risk I would take for a good feeling. I get a good feeling by knowing it was done correctly.
Generally speaking, get an LLC when you work with someone other than a spouse, have $3M in equity, or have separate distinct businesses. Be prepared to spend $20K for a complete plan. A single LLC will be a waste for you.
LLC members and managers are public records in many states. Unless you plan to hire someone to be a registered agent, your name and address will be a public record, and no, you can’t use a PO box for legal service. It must be an address where someone can take physical delivery. For many smaller investors, that is there personal address.
A DBA will do the same thing for a fraction of the cost.
Your plan is to operate in the #1 way LLCs are pierced. An LLC owner can’t be a manager if you want real protection.
Banks don’t care about entities. They care about a solid business plan, assets, and credit history. Having an entity may even make it harder to secure prime financing.
A DBA does the same thing.
A DBA has those too.
Like I said early, learning about an LLC is done in court. You can draft your own operating agreement, but you won’t know what works until you actually have to defend it or know someone who has. I don’t see that happening unless you plan to get sued frequently.
I can cut my own hair and do my own maintenance and repairs cheaper than professionals. That doesn’t mean I do a good job. Most DIY legal work is a you-get-what-you-pay-for-situation. You pay next to nothing and you get next to nothing.
j1dias, Thanx for you advice. I’m not sure a DYI LLC is for me at this point.
Thanx BLL. I appreciate you input. I know you give a lot of advice on this forum and I’m glad you spend the time to help. Now I have a “landmark” to go by. Until I get to that point, I assume I need to use sound business practice, ample insurance and a homestead exemption for protection. Is there anything else I should do? Thanx.
Hey BLL - Thank you for taking the time to share your experience and knowledge. Your points make sense and I respect your insight. I will look into the DBA. I haven’t thought about that. THANK YOU!
One thing though that made me think - you say we should hire an attorney. However you also say that there are probably only a dozen or so attorneys in the US that have more than a basic understanding
“There are only about a dozen or so attorneys in the US that have more than a basic understand of the issues involved.”
If there are so few, I am sure they are very expensive and probably not available for a small investor like me. So in one hand you suggest we seek legal counsel, but in the other hand you also say that the majority of the attorneys have only a basic understanding of the topic… This doesn’t make me feel very confident on paying someone to do it for me… BLL - I am not trying to be a jerk here. I am only trying to clarify this. As I recognized in one of my earlier posts I tend to be very detailed and specific - I don’t like to assume things. I rather ask clarifying questions than assume something wrong.
Thank you again for volunteering your time to share your knowledge.
Have a good Sunday! Talk soon!
Some of them are very expensive and their client base is the 10 million plus club, which puts them out of reach for most people. However, there are others with clients in the 1 to 10 million range that do work with smaller investors and you do have access them. You use your local tax expert and attorney to retain them. You can hire them directly, but I prefer this type of filter because the national experts keep current with all the latest laws and court cases, but lack the intimate knowledge of your situation. Your local experts have a relationship with you, know your situation, and most importantly, act as a gate keeper to make sure everything works well for you.
I would encourage you to continue your study and become very knowledgeable in the area. At some point, you will be able to tell the difference between crap and a well thought out plan. You will have a much better understand of what you need and be able to determine if someone is pushing what is easier for them.
In your research, you will learn that all this LLC and asset protection talk is more smoke and mirrors than fact. Few judgments ever exceed the insurance limits. That means the protection of an LLC or plan is never used. Taxes are the true destroyer of wealth. Think of it this way. How much do you pay in taxes each year? How much do you pay in lawsuit settlements?
If you continue to ask questions, I will answer them to the best of my ability.
BLL - Thank you. This was not my original thread but you are really providing valuable information. I got 8 books yesterday from the local library on LLCs and Corporations. Actually one is more focused on forming a small business (but it does talk about the different types of entities). I started reading last night before going to bed. Interesting stuff.
I also researched the DBA stuff in Arizona. It costs only $10 to register and it is valid for 5 years. Cheaper than the $50 registration fee for the LLC… :O) However I do prefer to open the LLC. I still feel it will look more professional to lenders and other business relationships. In my mind it says I am serious about this business. In addition I do understand that in the beginning I will probably have to co-sign for the loans. But as the business grows and I demonstrate a proof record of good management, I believe the LLC will not need my co-signature in the future. I will then be able to keep debt out of my credit report, which will be good.
I do understand that whatever business structure I create I will always be responsible for my acts. So if I change a water heater myself and it blows on someone’s face, I am liable. And this is the reason why I need to have an effective liability insurance policy.
Thank you again for all your help. And I will continue to post my questions and insights.
Have a great Sunday!
Some of the posts make it sound as if you will lose everything if you don’t set up the LLC correctly. However, if you get sued and held the property privately you were going to lose everything anyway. Why not buy more insurance if your so worried about getting sued. Maintaining an LLC isn’t that hard. Capitalize it properly and don’t comingle your personal money with the LLC money. That is the biggest mistake and easiest way to pierce the corporate veil.
I have a stupid question… (but I promise I’m not trying to draft my own Operating Agreement:)
What’s the legal/technical difference between a “member” and “manager” in/for an LLC? Is there any difference in liability exposure?
I’m guessing the title doesn’t matter (as far as liability protection) if that individual is doing the actual day-to-day managing of a property?
Thanks.
You will lose everything if there is an excess judgment and the LLC isn’t set up correctly. By set up, I don’t only mean filing paperwork correctly or maintaining the corporate formalities. That is a given and you are correct that those are the biggest mistakes made.
By set up, I also mean the operating agreement contains language that makes it difficult, if not impossible, to foreclose on a member interest and to prevent a creditor from actually collecting on charging orders. All the cases where an LLC has failed lead directly to a poorly drafted operating agreement. An LLC is needed when there is an excess judgment. Insurance pays anything before that (and you are right to mention it) and good business practices will prevent lawsuits.
Manager runs the LLC.
Member owns the LLC.
Member-manager owns the LLC and runs it.
A member who does not manage or is not involved in the day-to-day operations risks only his investment in the LLC. There is no way his personal assets are at risk due to LLC liability.
A manager is personally responsible for whatever he does in the name of the LLC. If he causes an injury by his personal actions, the LLC is responsible and he is personally responsible. LLC assets will be used to pay the judgment and his personal assets will be used to pay the judgment.
Lesson: don’t be a member manager. Own the LLC in a different name if you plan to manage it. A good attorney will evaluate your situation to know what is best for you.