Author Topic: Should I create an LLC for investment properties?  (Read 533 times)

A.Yupster

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Should I create an LLC for investment properties?
« on: October 01, 2017, 11:05:37 AM »
I currently own 4 properties. Of the 4, I live in one, I rent 2 out, and the last one I bought with my brother, which he currently lives in. I originally thought since I only own 4, I didn't need an LLC. But a couple have appreciated quite a bit, and wanted to revisit this. I live in Illinois (primary), and the 2 being rented and 1 with my brother are all in California.

Do you all have LLCs for your investment property? And how did you determine was the right time for you to create one?

Slow2FIRE

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Re: Should I create an LLC for investment properties?
« Reply #1 on: October 02, 2017, 07:19:49 PM »
I don't have an LLC for our expensive property.  I've read that it is actually quite easy to "pierce the veil" of an LLC even if you wrap it up in a Land Trust that is controlled by an LLC.

Therefore, I just carry an Umbrella policy.  I don't know what value to set an umbrella policy for so we just have $1M coverage.  When we acquire a second property (if we acquire a second property) or when our assets that are subject to forfeiture are high enough we'll probably increase coverage to $2M.

SeattleCPA

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Re: Should I create an LLC for investment properties?
« Reply #2 on: October 03, 2017, 07:36:39 AM »
First, full disclosure: I have a bunch of downloadable LLC do-it-yourself kits we sell... very fairly, you can assume I lack some objectivity here.

But some thoughts and comments:
1. To get this out on there, you can probably form an LLC yourself. Steps you follow are here: https://evergreensmallbusiness.com/all-states-real-estate-investor-llc-formation-kit/forming-an-illinois-limited-liability-company/ and, yes, there's also a downloadable kit "sold" on that page. But the steps and links you use are there and those may be all you need.
2. People say the LLC or corporate veils are easy to pierce. I'm told that's not the case by attorneys who practice in this area. One attorney, e.g., explained situation to me this way... You want to think about LLCs and corporations as "products" or "insurance policies" your state sells. The state incurs essentially no cost to create or maintain other than shuffling a few sheets of paper and an annual letter. Yet state dings you a few hundred bucks to set up and then dings you again every year often another hundred bucks or so. Accordingly, the state has no reason to allow some court to damage the value of about the sweetest protection racket you can imagine.
3. The worst case scenario an LLC protects you against according to a bankruptcy attorney in town we know is the "slip and fall" accident. I.e., you'd lose your property in a worst case scenario... but that's all.
4. Same attorney, BTW, says a liability policy should work almost as well.
5. You would put each property into its own LLC.

P.S. In some states, like California, LLCs are so expensive you need to really assess whether the protection they provide is worth it.
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Slow2FIRE

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Re: Should I create an LLC for investment properties?
« Reply #3 on: October 03, 2017, 09:52:33 AM »
Sounds like an LLC is often about the same price as $1M in Umbrella coverage.  In that case, one could do both.  However, keep in mind that you need to do all the proper actions of an LLC or risk losing LLC protection (voting, meeting minutes, proper capitalization, etc)

Listening to Planet Money on NPR, it sounded fairly easy to set up an offshore company to hide ownership of your property if you wish to really make it difficult (they used Belize).  You can even have a Delaware business control the offshore company which owns the property.  Offshoring, means the US govt has to get involved to pierce the veil which shouldn't happen if you properly pay taxes and file paperwork.

For your consideration for an LLC:
https://www.nolo.com/legal-encyclopedia/personal-liability-piercing-corporate-veil-33006.html
Quote from: nolo
When Courts Will Pierce the Corporate Veil

Courts might pierce the corporate veil and impose personal liability on officers, directors, shareholders, or members when all of the following are true.

There is no real separation between the company and its owners. If the owners fail to maintain a formal legal separation between their business and their personal financial affairs, a court could find that the corporation or LLC is really just a sham (the owners' alter ego) and that the owners are personally operating the business as if the corporation or LLC didn't exist. For instance, if the owner pays personal bills from the business checking account or ignores the legal formalities that a corporation or LLC must follow (for example, by making important corporate or LLC decisions without recording them in minutes of a meeting), a court could decide that the owner isn't entitled to the limited liability that the corporate business structure would ordinarily provide.

https://en.wikipedia.org/wiki/Piercing_the_corporate_veil
Quote from: wikipedia
Piercing the corporate veil typically is most effective with smaller privately held business entities (close corporations) in which the corporation has a small number of shareholders, limited assets, and recognition of separateness of the corporation from its shareholders would promote fraud or an inequitable result...
In the United States, corporate veil piercing is the most litigated issue in corporate law.[25] Although courts are reluctant to hold an active shareholder liable for actions that are legally the responsibility of the corporation, even if the corporation has a single shareholder, they will often do so if the corporation was markedly noncompliant with corporate formalities, to prevent fraud, or to achieve equity in certain cases of undercapitalization...
Generally, the plaintiff has to prove that the incorporation was merely a formality and that the corporation neglected corporate formalities and protocols, such as voting to approve major corporate actions in the context of a duly authorized corporate meeting. This is quite often the case when a corporation facing legal liability transfers its assets and business to another corporation with the same management and shareholders. It also happens with single person corporations that are managed in a haphazard manner. As such, the veil can be pierced in both civil cases and where regulatory proceedings are taken against a shell corporation.

SeattleCPA

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Re: Should I create an LLC for investment properties?
« Reply #4 on: October 03, 2017, 12:23:55 PM »
Sounds like an LLC is often about the same price as $1M in Umbrella coverage.  In that case, one could do both.  However, keep in mind that you need to do all the proper actions of an LLC or risk losing LLC protection (voting, meeting minutes, proper capitalization, etc)

So I used be one of the instructors that taught the "Choice of Entity: S Corporation vs. LLCs" class in the masters in tax program at Golden Gate University. (This is the big graduate tax program in the country BTW...)

But there were attorneys teaching the class, too. And the attorneys would say that one of the big advantages of an LLC is that stuff like voting... and minutes... etc... aren't a requirement of an LLC. An LLC is basically a "lite" corporation. Same great protection, but only have the calories.

This also meant that because you weren't required to do this other stuff that is required for most corporations, you weren't as likely to "goof up"...
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A.Yupster

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Re: Should I create an LLC for investment properties?
« Reply #5 on: October 03, 2017, 11:21:38 PM »
Thanks for your input! I will have to research more on the Umbrella Coverage and the Piercing the Veil for LLCs. I should do at least one of those so I am a little more protected. Feels like I have a lot of exposed risk right now.