Author Topic: LLC  (Read 13294 times)

salmp01

  • Stubble
  • **
  • Posts: 120
  • Location: Minneapolis, MN
LLC
« on: February 14, 2012, 08:04:24 AM »
In the last few years I started buying rental properties (up to 17 now).  Three of these properties are in an LLC (self directed IRA) but the remaining are in my personal name.  I have talked casually to a couple attorney friends and they insist that I should put all of these in several LLCs.   I have a 3 million dollar liability policy and have always thought that this should cover me if get sued.  I have not met with an attorney to look over what I have and am wondering if the money spent would/could be worth it.    Since Iím relatively new at this Iíd like to hear any advice on this topic.

arebelspy

  • Administrator
  • Senior Mustachian
  • *****
  • Posts: 27506
  • Age: -999
  • Location: Traveling the World
Re: LLC
« Reply #1 on: February 14, 2012, 08:19:09 AM »
I've read arguments both ways.

LLCs versus an umbrella policy really are the two main ways to protect yourself. Since you have one of them set up, I wouldn't stress too much about it. I do like the LLC for tax purposes.

What you hit that number properties, it might be prudent to transfer them over into LLCs based on the equity amount in each property.

A lawyer is going to tell you to set up something like an LLC because that's his area of expertise and that's what he believes in. An insurance salesman will have you set up an umbrella policy for the same reason.  I feel a mixture of the two is best, but you really will hear opinions on both sides and I don't necessarily agree that one is vastly superior to the other, or there wouldn't be debate about it.

Also, good for you!
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with two kids.
If you want to know more about me, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

salmp01

  • Stubble
  • **
  • Posts: 120
  • Location: Minneapolis, MN
Re: LLC
« Reply #2 on: February 14, 2012, 09:46:13 AM »
Thanks for the reply!  I have a question about one of your statements.  You said "I do like the LLC for tax purposes."  Once of the reasons I don't want to set up multiple LLCs is b/c it can be a pain.   If I have several LLCs I'll need to have several bank accounts/credit cards and I need to file several different tax docs.  My accountant charges a little less than $300/year for each LLC return so that would also add to my costs.  If I have them all in my name I can use one bank account/credit card for all.   If there are tax benefits I'd like to hear about them.  I was thinking the only benefit to creating several LLCs would be to limit the liability.

Thanks again!

Sparafusile

  • Bristles
  • ***
  • Posts: 333
  • Age: 37
  • Location: Indiana, USA
Re: LLC
« Reply #3 on: February 14, 2012, 09:50:39 AM »
I am not a lawyer.

I don't know about creating several LLCs, but having all your property in one (or more) LLCs gives you a great tax advantage. Say, for instance, you need to drive to a property to fix a leaky faucet. If it's a property that's owned by an LLC, the travel is deductible, the replacement faucet is bought with pre-tax money, and if it turns out you accidentally installed a grenade launcher that looked like a water faucet, you wont lose anything in the resulting law suit*. The opposite is true for non-LLC owned properties.

* Ok, that was probably an exaggeration, but anything that's not grossly incompetent will be blocked by the limited liability of the company and not end up in your lap.

lazydragon

  • 5 O'Clock Shadow
  • *
  • Posts: 13
  • Age: 44
  • Location: Canada
Re: LLC
« Reply #4 on: February 14, 2012, 10:37:53 AM »
I assume that LLC = Limited Liability Company.

If that is the case, why can one not put all the properties in one company and avoid the multiple (e.g., $300) accounting costs and hassles of doing paperwork for multiple companies?  Is there some downside or legal limitation to using those?  I haven't been a landlord but have self-incorporated in the past for consulting purposes and found the tax savings to be immense.

salmp01

  • Stubble
  • **
  • Posts: 120
  • Location: Minneapolis, MN
Re: LLC
« Reply #5 on: February 14, 2012, 10:47:38 AM »
The downside to putting all properties in one LLC is that i'm not really limiting my liability.  If I get sued from one owner they could potentially go after all the other properties in the LLC.  I'm sure a competent attorney would recommend having one LLC for each property and that could be a pain to manage.

Regarding the post to the Tax advantage of an LLC.  I currently own all my properties in my name and I write off everything (including mileage) and I don't think more can be written off if it's in an LLC.  If I were to purchase a faucet it would be with after tax money but this would be used as a deduction if the property was in an LLC or owned by me personally.    It's true that if I have one property in an LLC and I get sued for 5,000,000 that they could only take that property.  But if I were to truly take advantage of limiting my liability I'd need one LLC for each property.

palvar

  • 5 O'Clock Shadow
  • *
  • Posts: 73
  • Age: 6
  • Location: Philadelphia
Re: LLC
« Reply #6 on: February 14, 2012, 12:16:35 PM »
The tax advantages for having an LLC are in comparison to other forms of incorporation.  You are able to deduct expenses either way.

//I'm not a lawyer or CPA

Sparafusile

  • Bristles
  • ***
  • Posts: 333
  • Age: 37
  • Location: Indiana, USA
Re: LLC
« Reply #7 on: February 14, 2012, 01:21:13 PM »
Have you looked into the possibility of creating a Series LLC? It's not very common, but seems like it would solve all your problems:

http://en.wikipedia.org/wiki/Series_LLC

The bottom of the page lists the locations they are allowed.

Edit: Just noticed you location. Looks like it's not available to you. You may be able to form the Series LLC in a different state then do business in your current location. There's always the chance that your local laws might night recognize the series-ness of your company. Looks like the best way is one LLC per rental. And find a accountant that will give you a break or learn to do the taxes yourself.
« Last Edit: February 14, 2012, 01:27:39 PM by Sparafusile »

arebelspy

  • Administrator
  • Senior Mustachian
  • *****
  • Posts: 27506
  • Age: -999
  • Location: Traveling the World
Re: LLC
« Reply #8 on: February 14, 2012, 04:46:49 PM »
Have you looked into the possibility of creating a Series LLC? It's not very common, but seems like it would solve all your problems:

http://en.wikipedia.org/wiki/Series_LLC

The bottom of the page lists the locations they are allowed.

Edit: Just noticed you location. Looks like it's not available to you. You may be able to form the Series LLC in a different state then do business in your current location. There's always the chance that your local laws might night recognize the series-ness of your company. Looks like the best way is one LLC per rental. And find a accountant that will give you a break or learn to do the taxes yourself.

My lawyer was just telling me the other day I may want a series LLC for my properties, but I haven't had a chance to look into it yet.

As far as separate LLCs vs 1, IMO the best way to do it is by equity.  Decide how much you're comfortable risking, and put that much into one LLC.  Then start another.

For example, say you are comfortable having 250K (or 100K, or whatever) in one LLC.  If you have 10 properties, each mortgaged to the hilt and only worth 15k in equity each, they may all be in one LLC.  On the other hand, if you have 10 properties with 50-100K equity in each one, you may have 2-5 properties per LLC.

Deciding how many LLCs per property based on equity isn't a bad idea.
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with two kids.
If you want to know more about me, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

LAHK

  • 5 O'Clock Shadow
  • *
  • Posts: 3
Re: LLC
« Reply #9 on: February 15, 2012, 05:57:34 AM »
How much is a few million of blanket personal liability insurance in the US?  What about Canada (where I have a few dozen "doors")?
First time I heard of this strategy... up to this point I've been simply taking the legal risk (but thankfully nothing has happened for 5+ years.. knock on wood!)

arebelspy

  • Administrator
  • Senior Mustachian
  • *****
  • Posts: 27506
  • Age: -999
  • Location: Traveling the World
Re: LLC
« Reply #10 on: February 15, 2012, 07:04:03 AM »
How much is a few million of blanket personal liability insurance in the US? 

Get quotes from different insurance agents for your situation.  Typically they'll want all your other insurance with them, and at adequate amounts, to issue a large umbrella policy.

It's pretty cheap though.  A million should work out to around $200, or less, per year.  Probably can get a 3 million policy for about $300/yr.
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with two kids.
If you want to know more about me, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

StaceStache

  • 5 O'Clock Shadow
  • *
  • Posts: 62
  • Location: The South
Re: LLC
« Reply #11 on: February 15, 2012, 08:50:32 AM »
I just want to state (as a tax accountant and almost-CPA) that anyone taking advice from/reading this thread should be aware that laws/requirements for LLCs vary from state to state. What is true for an LLC of one Mustachian may not be true for another Mustachian in a different state.

For Federal tax purposes, LLCs are generally treated as partnerships, unless you elect to be taxed as a corporation. HOWEVER, if you are a single-member LLC, you have to file a schedule C as a sole proprietor (again, unless you elect to be taxed as a corporation).

Passed Doo

  • 5 O'Clock Shadow
  • *
  • Posts: 9
Re: LLC
« Reply #12 on: February 15, 2012, 11:11:04 AM »
Congratulations to All Fellow Moustachians!    You ARE The Future!     Go For It!

Celebrating 30 years as a landlord in 2012 (believe me, time does fly), but Still Learning:

A few 'good' recent reads, all available online/Amazon, etc. These resources may answer most if not all of your LLC questions (and then some) :

1. How to use limited liability companies  & limited partnerships - Second Editionby Garrett Sutton, Esq.  isbn 0-9713549-01 Published by SuccessDNA

2. Building wealth one house at a timeby John W. Schaub  isbn 0-070-144835-7  Published by McGraw Hill

3. Limited Liability Companies for Dummies - 2nd Edition  (yeah, I HATE the title too - excellent easy valuable read though)
by Jennifer Reuting (founder of MyLLC.com)  isbn 978-0-470-88142-2
Published by Wiley publishing

I have picked up something important from each book. I too am ultimately worried about, (among other things like a confiscatory government),  in a word liability, and will probably be forming a new rental unit entity soon to help better manage my rental property assets & liabilities as we all go forward towards ..... the future! Remember, these materials are all probably tax-deductions as well. Check with your professional bean-counter.

Stay Safe, Stay Healthy & Build Wealth!  All the Best!

Sparafusile

  • Bristles
  • ***
  • Posts: 333
  • Age: 37
  • Location: Indiana, USA
Re: LLC
« Reply #13 on: February 15, 2012, 11:25:31 AM »
Can you share you experience, Passed Doo, and let us know how you handled the OP's situation? Did you create a separate LLC for each property or one for all of them?

arebelspy

  • Administrator
  • Senior Mustachian
  • *****
  • Posts: 27506
  • Age: -999
  • Location: Traveling the World
Re: LLC
« Reply #14 on: February 15, 2012, 12:07:51 PM »
1. How to use limited liability companies  & limited partnerships - Second Editionby Garrett Sutton, Esq.  isbn 0-9713549-01 Published by SuccessDNA

2. Building wealth one house at a timeby John W. Schaub  isbn 0-070-144835-7  Published by McGraw Hill

3. Limited Liability Companies for Dummies - 2nd Edition  (yeah, I HATE the title too - excellent easy valuable read though)
by Jennifer Reuting (founder of MyLLC.com)  isbn 978-0-470-88142-2
Published by Wiley publishing


Thanks for the recommendations.  The second one was the first real estate book I read, and remains one of my favorites after having read over a dozen more.

It's not super realistic about house appreciation rates, IMO, but some solid info and inspiring.  Pretty quick and easy to read, as well, it's not a daunting tome, so very good for the beginner.  I'd recommend anyone thinking about starting real estate investing pick that up (among others).
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with two kids.
If you want to know more about me, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

Passed Doo

  • 5 O'Clock Shadow
  • *
  • Posts: 9
Re: LLC
« Reply #15 on: February 15, 2012, 01:45:14 PM »
"arebelspy
It's not super realistic about house appreciation rates, IMO, but some solid info and inspiring.  Pretty quick and easy to read, as well, it's not a daunting tome, so very good for the beginner.  I'd recommend anyone thinking about starting real estate investing pick that up (among others)."

I agree with you on the appreciation rates point. Funny thing though, as I re-read (this book, 1st ed. was a primer for me too), 'beginners' or 'starting' books, I seem to always pick up some valuable tip from them - funny how that goes !

As I get older and more senile in my early fifties, I get so excited to see people, especially younger people getting started on building real wealth and controlling their early retirements on their own I tend to err on being simplistic, as in one step-at-a-time. If only the net and sites like this existed when I got stsarted - Yikes, what a thought!

HAPPINESS IS A POSITIVE CASH FLOW !  Be Wealthy !

Midwest

  • Handlebar Stache
  • *****
  • Posts: 1326
Re: LLC
« Reply #16 on: February 18, 2012, 07:49:25 AM »
If you were my client (I'm a CPA), I would recommend investigating setting up LLC's for individual properties, groups of properties or the real estate as a whole.  Having said that, I'm not familiar with your state or exact situation so please consult a local attorney and CPA for additional advice.

Assuming you own the property individually, the LLC will be disregarded for tax purposes.  This means, from your accountants perspective, the federal tax filing will be the same with our without the LLC.

In my state, an LLC costs roughly $200 to form if you do it yourself.  Using an attorney might drive your cost up to $600 per LLC.  No annual filing at the state level in my state.  Some state's do require an annual filing and yours might, so I would recommend you check that out before forming.

An LLC is cheap insurance.

Midwest. 

Mike Key

  • Stubble
  • **
  • Posts: 247
  • Age: 36
  • Location: Nomadic
  • Entrepreneur & Adventure Seeker
    • Tiny House - Big Backyard
Re: LLC
« Reply #17 on: February 18, 2012, 08:41:02 AM »
I currently run two of my businesses thru LLC's. And when the day comes that we get into rental property, we will be going the LLC route.

Can I recommend this book: Rich Dad's Advisor: Own your Own Corporation. The book really helped me understand all the differences, it's written by a lawyer who helps setup LLC's professionally and he goes in depth about their advantages.

An Umbrella policy is great and all, but at the end of the day, you don't want someone to be able to come after you or your family. Thus the need for a corporation.

Mike Key

  • Stubble
  • **
  • Posts: 247
  • Age: 36
  • Location: Nomadic
  • Entrepreneur & Adventure Seeker
    • Tiny House - Big Backyard
Re: LLC
« Reply #18 on: February 18, 2012, 08:47:56 AM »
If that is the case, why can one not put all the properties in one company and avoid the multiple (e.g., $300) accounting costs and hassles of doing paperwork for multiple companies?  Is there some downside or legal limitation to using those?  I haven't been a landlord but have self-incorporated in the past for consulting purposes and found the tax savings to be immense.

Because if I sue the LLC for all it's worth I get all the properties.

I'll give you an example, my Uncle owns a contracting business and for 30 years he was a sole proprietor. Incredibly stupid and dangerous, he was lucky to never been sued. If he had been sued during this time, someone could take his business, his house and the bed he sleeps on and destroy his life and empty his banks. IT DOES HAPPEN.

Today he has his company broken up into two LLC's. The reason for two verses on is this. If my uncles company gets sued, he losses his business, but his personal home and money is safe. However now his business is gone and he has to start from scratch.

With two LLC's his doing business as company pay's employees and gets jobs. The second LLC owns all of his companies equipement and leases the equipement to the first LLC. Thus only the first LLC can be sued if something happens on a job. They will get what that's worth which is payroll.

The first LLC goes out of business, but my uncle still has all his tools and equipement and can go back into business faster than if everything was in one LLC.

Putting properties into individual LLC's prevents people from suing and taking everything.

That's the best way I can explain it.

Joementum

  • 5 O'Clock Shadow
  • *
  • Posts: 7
Re: LLC
« Reply #19 on: February 19, 2012, 11:22:17 PM »
Just so you all know, an LLC's corporate veil can be pierced by any lawyer than knows what they are doing if you do not do everything correctly. Here's a good article regarding it.

http://www.reliablellcfilings.com/2009/06/piercing-corporate-veil-are-your.html

Just because you have an LLC does not mean you are personally immune to being sued. Anything can happen.

Mike Key

  • Stubble
  • **
  • Posts: 247
  • Age: 36
  • Location: Nomadic
  • Entrepreneur & Adventure Seeker
    • Tiny House - Big Backyard
Re: LLC
« Reply #20 on: February 20, 2012, 05:37:42 AM »
Just so you all know, an LLC's corporate veil can be pierced by any lawyer than knows what they are doing if you do not do everything correctly. Here's a good article regarding it.

http://www.reliablellcfilings.com/2009/06/piercing-corporate-veil-are-your.html

Just because you have an LLC does not mean you are personally immune to being sued. Anything can happen.

Great article, however it's actually a VERY RARE occurrence. But the point is you should have a Lawyer properly setup your LLC to insure that doesn't and cannot happen.

One of Garrett Sutton's books I have he specifically lists how often that's actually happened and how to avoid it.

Passed Doo

  • 5 O'Clock Shadow
  • *
  • Posts: 9
Re: LLC
« Reply #21 on: February 20, 2012, 12:21:42 PM »
Interesting read: 

http://survivalblog.com/2012/02/living-through-the-real-estate-crash-and-bankruptcy-by-brad-c.html

Careful, Fellow M's.

Many Lessons here. 

The World CAN be a very brutal place. . .

Ask Why this happened, and then What would YOU have done differently... Be Honest, it's the only way to learn.

Happy President's Day, both Dead and Alive (pun intended).

Make Money, Be Happy !

salmp01

  • Stubble
  • **
  • Posts: 120
  • Location: Minneapolis, MN
Re: LLC
« Reply #22 on: February 22, 2012, 03:07:59 PM »
Thanks for all the posts!  I purchased the Limited Liabilities for Dummies (2nd Edition) and itís quite informative.   Iíve also done lots of research since posting.  Below are some highlights:

If I create a single member I donít need to file a separate tax return for each LLC  (this can go on my personal return)

Single member LLCs have been disregarded in some states so itís best to have multiple people in the LLC (spouses not included).  The other partner could own a fraction of a percent but it should be someone you trust.

If I were to do this right I really should create 17 different LLCs since I have quite a bit of equity in each of these properties. This means 17 different business accounts!

If I have significant money in a bank or brokerage account or if I own personal property worth lots of money I should put these in an LLC also.

Iím really going to think about his and determine if my umbrella policy is enough or if I should implement some or all of these.

Thanks again!

Midwest

  • Handlebar Stache
  • *****
  • Posts: 1326
Re: LLC
« Reply #23 on: February 22, 2012, 03:47:37 PM »
I've never heard of a single member LLC being disregarded for liability purposes solely for having only 1 member, but that may be a state by state thing and I'm not an attorney. 

In my state, single member LLC's are quite common.  I have worked with many clients who happen to be attorneys and they have never raised a concern regarding having only one member.

You might consider speaking to an attorney and/or CPA with particular knowledge of your situation and area who could help design a structure that works for you.  An attorney could easily clarify the issue regarding single member LLC's and liability. 

FYI, if you have another member in your LLC you no longer have a single member LLC.  You would need to file a partnership return.  Forming a partnership would increase your complexity (which you seem to be trying to avoid).

Dollar D

  • 5 O'Clock Shadow
  • *
  • Posts: 6
Re: LLC
« Reply #24 on: March 01, 2012, 09:21:14 AM »
This is definitely one of those topics that there doesn't seem to be any clear-cut answer. Just like StaceStache said, the laws vary from state to state.

We hold all of our properties in our personal name on the advice of our lawyer. He said where we live (texas) it's pretty easy to pierce the corporate veil. Any lawsuit against your company is going to target you, personally, as well. We opted for the umbrella policy approach.

If you have a mortgage through a bank, there's also the tricky business of transferring the property to your LLC without alerting the bank. They can call that loan due when the property changes hands.

sirspiffy

  • 5 O'Clock Shadow
  • *
  • Posts: 13
Re: LLC
« Reply #25 on: March 06, 2012, 04:58:45 PM »
The LLC laws vary from state to state.  However in some the corporate veil has been pierced, in others there is precedence of discounting liability for single owner LLC's.
Your corporate structure varies Depending on how many properties you have and what insurance rates are.  Check with your local REIA because they usually get programs specifically for Landlords. 

The trick is balancing liability with Cost. 
for about <5 houses I'd go single LLC.  At 18 like the OP I'd definitely have a parent company filed in nevada for privacy. depending on the precedence laws+tax+insurance+accounting rates for my states, I might have another parent company locally which would hold the holding companies.  Depending on liability  in your state and expensive insurance it might make sense to hold all the properties in there own LLC.  if Insurance was cheap you could afford to group a couple of properties together to save on accounting with minimal elevation in risk exposure.   
Remember it is in the accountants and lawyers best interest to have a complicated corporate structure.   Its in the insurance companies and the Victim's best interest to have a high insurance policy.  Make it so you're covered just enough and no more, with minimum suit incentive, fraud is too easy and too rewarding these days. 

Mike Key

  • Stubble
  • **
  • Posts: 247
  • Age: 36
  • Location: Nomadic
  • Entrepreneur & Adventure Seeker
    • Tiny House - Big Backyard
Re: LLC
« Reply #26 on: March 07, 2012, 04:48:57 AM »
Every lawyer I spoke to before forming my LLC's told me that the "Corp Veil" being pierced is over blown and rarely happens. In the cases that it does happen, it happens generally to single member LLC's because the member was not running their business in a way that resembled a sole proprietorship. IE: Business accounts and things in their own name rather than the LLC's name. Thus making it easy for the lawyers to prove that the member of the LLC didn't actually run his business like an LLC and shouldn't be afforded the same protections.