When to start an LLC

I plan to start an LLC to do my investing so that when I buy a property I can stop claim to it and save on taxes and protect my assets. My question is “should I get my LLC before I buy my first house or after?”

Thanks, Weldon

Weldon,

A couple of things…

(1) An LLC is a “pass through” entity for tax purposes, so there is no tax savings. It is purely ‘asset protection’.

(2) You can do it either way. In the beginning (until your LLC has built up credit/credibility), you will most likely have to purchase under your personal credit and move the property into your LLC, anyway. A lot of folks wait until they have a few properties.

(3) If you need a local RE lawyer, let me know.

Keith

Thanks Keith.

I might have read out of context about saving on taxes, I believe I will get that info on the RE Lawyer from you.

Good idea on the attorney. Might want to talk to a CPA as well.

One thing, alot of attorneys will encourage forming an LLC, unfortunately, for all the wrong reasons (namely, because you pay them to do it!). I’m sure that Keith’s is upfront and honest, but if he recommends it, find out exactly WHY.

Personally, I don’t think that forming any business entity is smart until you know that you’re actually going to be in that business. You won’t know until you’ve bought at least your first property if you even like, or will actually do, this business.

Unless you have some reason that having a separate entity in a start-up business is sound legal advice (you own have of the Burger King fortune, for example), I just don’t understand the added costs of it.

Raj

Thanks Roger,

You and Keith always give good advise as I’ve seen reading through these Forums. As far as the LLC, there are so many different opinions out there that I figured that I would bring it here to see what you guys thought on the subject. I probably won’t start one right off the bat, I will most likely wait to see if I need one. If everything works out as I plan and I do 2,3,4 houses a month with a full staff I will probably start one, By then I should have a better feel for everything and have a better understanding.

Thanks all!

Weldon,

Forming an LLC will protect your personal assets. However, your real property will remain partitionable and subject to liens and encumbrances. An LLC should be only part of your asset protection strategy.

Good luck to you.

Da Wiz

Thanks Wiz,

So, from everyones response, I need to wait until I have assets to protect. Although I will soon have 100-200k to start my investing. What type of protection would I need if I was sued for some reason? And what are some reasons why I would be sued? Should I worry too much at first or what? So many questions!

Weldon

When you are ready to go, I’d recommend placing your property in a land trust, then assigning a 10% interest to yourself and 90% to your LLC. However, if you are the Managing Partner, you are able to assign the full 100% to your LLC. The LLC will protect your personal assets, while the Trust protects your real property. Good luck.

Da Wiz

Hi Wiz,

I have a question regarding creating a Land Trust. Who will be the Settler, Trustee and Beneficiaries ( i know this will be the LLC )? Is the % interest divided inside the LLC? Could you direct me to a site for a sample form of a Land Trus.

Thanks T

Thanks ttandoc,

We all have to here the Doc’s ramble about land trusts day in and day out and you just have to ask him something else. Now, we’ll be here for ages hearing how wonderful the PACtrust/landtrust/trusting parent stuff is. You’ll truly believe after hearing the speech that a landtrust will protect you from all harm, make you a millionaire overnight, and tuck you into bed at night ::slight_smile:

Weldon on to your questions:

What type of protection would I need if I was sued for some reason?
Good insurance. Both property and general liability.

And what are some reasons why I would be sued?
You looked at someone wrong. You smell funny. You make more money than they do. Pretty much any reason under the sun, people will think of ways to sue IF they think that they have a chance of winning. The key to not getting sued is a) don’t make people want to sue you (don’t make them MAD!) and b) using the proper forms/contracts to protect you. If an attorney doesn’t think that they can win a case, then they will usually require a large chunk of funds upfront. The junk lawsuits won’t do that, hence no lawsuit.

Should I worry too much at first or what? I don’t worry about getting sued. I pay my attorney to do that!

Raj

T,

For a property you live in, you (or your LLC) will be the settlor/beneficiary. You must name a Trustee and I always recommend a non-profit corporation acting only for the benefit of its members. Appointing a trustee other than a corporation would allow the property to fall into the trustee’s probate and other legal problems. The % interest is divided inside the trust, not the LLC.

If you are buying a property “subject to”, your seller is the settlor/beneficiary and retains 10% interest in the trust to avoid the DOSC. You become a 90% beneficiary, and I usually assign a 50% interest to my tenant/buyer.

I hope this is of some help to you.

Da Wiz

Thanks Roger

With all due respect to Raj, whose opinions I find very helpful, I’m very appreciative of Wiz’s response. Very informative. Thanks guys.

Rick

Maybe you just haven’t heard it enough, Rick!

Keith

I would also like to hear more about starting an LLC. I have owned 3 investment rental properties in addition to my personal home for about 10 years now. Just within the past year I have realized that I am an investor and should be doing more with investment property. After reading up on this I started hearing about LLC’s and asset protection. I have an umbrella policy, but now I’m realizing that might not be enough. I would like to hear any information anyone is willing to send my way on LLC’s. As much reading as I have done about it, it really seems confusing to me. To start, would I do three separate LLC’s? How do I transfer the mortgage to the LLC?

I am also looking for an investment attorney and a CPA. What is the best way to go about finding one? I realize that the attorney would be able to answer my questions, but I would like to go in knowing something about this so that I don’t end up being taken.

Thank you anyone who is willing to take this on.

Da Wiz,

I don’t agree with much of anything that you said about trusts.

First, you don’t want to put your personal residence in a land trust. Doing so will cause you to lose the tax exemption on the sale of your personal residence. Therefore, personal residences should almost never be placed in a trust.

Second, it is not legal in many states for the trustee to be a corporation. In Ohio, the trustee must be a real live person - not an entity.

Third, a Trustee’s legal problems have absolutely no impact on your property that is in the trust. The exception would be fraud on the part of the trustee who does something illegal with the property, such as sell it and try to keep the proceeds. In a properly crafted land trust, the beneficial interest can easily change the trustee if desired.

Fourth, the actual “ownership” of the property is determined by the beneficial interest of the trust. If the beneficial interest is an LLC, then the % ownership is determined by the LLC.

Fifth, you don’t want the seller to have ANY beneficial interest. If you give them 10%, then they own 10% of your property. It is crazy to give someone 10% of your property to avoid a DOSC that will never be acted on!

Sixth, you certainly would not want to assign 50% of the beneficial interest to a tenant buyer unless they give you a down payment of 50%.

Finally, land trusts don’t provide ANY asset protection what-so-ever! They do provide some privacy for the real owners (beneficial interest) but don’t provide any limited liability. That’s why you need your LLC to be the beneficial interest.

Mike

Now Mike, you know that if the Doc’s special land trusts will wipe your backside after you do your business that they are bound to be able to overcome all of those ‘minor’ problems that you mentioned! :smiley:

Rags:

Starting an entity is all the rage right now, asset protection and all the other hype. But yet you, as have many, many, many other business owners, have for years been a sole proprietor without any problems. In other words, it may or may not be necessary.

There are really two opposing views on the subject. There are some investors that believe in the ‘hide it so they can’t find it’ theory. In short, that’s where they put each property in a land trust owned by an LLC, each LLC owned by a Corp that’s owned another LLC, etc, etc. Besides the fact that that gets expensive, the amount of paperwork would be staggeriing. Of course, most lawyers aren’t going to pursue a lawsuit against such a mess either.

The other view is simply get good insurance and alot of it. This is a good thought process, because simply having a LLC does NOT protect you from liability. The company still needs insurance to protect itself.

The main purpose of any biz entity is to separate personal assets from business assets, so that if one is sued, you lessen the chance of tying up both in court. At what point that splitting those is the most beneficial would be up to you based on the advice given by your attorney and CPA.

As to the best way to find them, the would be to ask other investors who they recommend and why. Interview with them and see if you click.

Raj

Roger thank you so much for your reply. As much as I still don’t understand it, I totally understand what you are saying. It is totally up to me regarding my comfort zone for asset protection. I often hear or read to never ever purchase property in your own name, always use an LLC. Why is it the latest rage now? It does sound very costly. I’m not going to pursue it for now, but I will take it up with an attorney. I know I am at least protected on the liability end.

I don’t know of any investors in the area for recommendations, so I will look for names of attorney’s and CPA’s in local papers and magazines. Any suggestions as to what to ask them to make sure they are the right fit for me? Would I do just a phone consultation or actually set up an appointment?

Thank you for your help.

Rags,

It really depends on whether you have any assets to protect. If you have no money, no credit, and can’t find 2 dimes to rub together, you probably don’t need an LLC. If you’ve got several hundred thousand dollars of personal assets, then I’d definitely use an LLC. LLC’s are not expensive or difficult to set up.

Good Luck,

Mike

Well my investment properties and my personal properties would be my asset that I would want to protect. It just sounds so very confusing with the land trusts (I’m assuming that would be the property) owned by the LLC and the LLC’s owned by the corporation and so on and so on. Do I need a separate LLC for each property? And then what about the mortgage when I don’t own the property personally any more, but the mortgage is still in my name? Do I then own the corporation? Sorry to ask so many many questions, but I am trully trying to figure this out before I talk to an attorney. If I do need more then one LLC, would they then be under one corporation?

Thank you