Author Topic: Should I create an LLC for investment properties?  (Read 941 times)

A.Yupster

  • 5 O'Clock Shadow
  • *
  • Posts: 3
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?

SeattleCPA

  • Handlebar Stache
  • *****
  • Posts: 1203
  • Age: 58
  • Location: Redmond, WA
    • Evergreen Small Business
Re: Should I create an LLC for investment properties?
« Reply #1 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.

SeattleCPA

  • Handlebar Stache
  • *****
  • Posts: 1203
  • Age: 58
  • Location: Redmond, WA
    • Evergreen Small Business
Re: Should I create an LLC for investment properties?
« Reply #2 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"...

A.Yupster

  • 5 O'Clock Shadow
  • *
  • Posts: 3
Re: Should I create an LLC for investment properties?
« Reply #3 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.