I Have An LLC... Uh, Now What?
So, here's the story.
Three friends and I formed an LLC under the premise that it is a Property Management company that will deal in all types or real estate transactions. No banks that we found would allow us to purchase property under the LLC, so here's what happened:
2 of us had horrible credit (yours truly being one) and the other 2 had great credit. A house was bought in the name of the 2 GOOD credit members (they get to write off the interest, and we don't, but we're happy just having our foot in the door after such bad credit days). It's a really good deal, purchased for $55 at 5% down, but appraised at $93. They 'hired' the company to 'manage' everything with the house. All costs and income is split equally, since everything is run through the LLC. Now, the house has been homesteaded in the name of ONE of the guys who bought it, because originally, we were planning on simply flipping it. Now, since we've discovered the beauty of an Equity Line of Credit, we've decided to keep the house and rent it out, using the HELOC for down payments on a couple of other properties, then, use a line of credit on those to buy more... in a sense, continuously using the equity to expand, as long as rents cover the payments.
My questions:
(1) Sound like a good plan?
(2) We want to protect ourselves. (let me state first, that in Louisiana, as I understand it, Beneficiary Interest in a trust is considered realty, thereby eliminating any asset protection. ) If the LLC is sued due to something happening to one of the renters, can we lose the house if the LLC is only managing the property, or is it the Property owner that is sewed?
(3) If we manage to put all of our properties into the LLC eventually, though how we do not know, and the LLC is sued, we can't be touched personally, but can all of our properties can be taken away from the LLC? Therefore, is it actually better to run them through the company or to have the company own them?
See, the thing is, we formed the LLC to prevent ourselves from losing the property. We don't have many PERSONAL belongings to be at risk, compared to the amount of property that we plan on amassing. So, by putting everything in the LLC, aren't we setting ourselves up to lose ALL of our property if something goes wrong on just one of them?
(4) I realize you can't homestead a property if you're going to rent it out. So, that will have to be changed. Will a mortgage company be upset to learn that you're not going to live there, when in all truth, it was your original intent to NOT rent it out?
They say the 1st property is the hardest. It's been a learning experience and I've had a great time.
But, thank GOD it's almost over. 
Thanks for any info or advice...
-Mike
how about forming an LLC for each property you guys own and making it the beneficiary?
this is extremely expensive in CA (about $800/yr) but might
be cheaper where u live.
just my 2 cents.
--Hmmm... Interesting. Hadn't thought of that. Thanks!
--Forming an LLC in Louisiana is about $200 (I think we paid $180 or so, because we're friends with the lawyer). Okay, I'll look into that.
--What about the other thing? If a house is being managed by a property management company, who is liable in lawsuits? The company, or the owner?
-M
It depends on the matter. Here in LaLa land there is a tendency to name all parties. In realty concerns the blame is sometimes hard to pin. Like the Manager slapped the kid. Is the manager responsible? Or is the Management Company responsible. Or is the owner responsible cause he knew about it and applauded the act. On it goes. Its boring but the pettyness of it all is constant and ongoing. I just prepare for almost anything. I got bit by a dog and to protect myself being old and feeble and walking on a cane. I fed him a hand then chopped his neck with the other hand. So they have threatened suit. I have offered to buy them a new dog,even one with good dentures. But so far nothing. Their Lawyer is a nice Pakistani who insists that I present him pictures of my bit buttocks. I think he has a small sexual problem. But wot the hell if teethmarks on a a$$ turns him on thats his problem. I know I should have claimed injury but really. I should have just throttled the dog, but he scared me a sudden bite to the a$$ does that you know. I offered a good funeral. My cat said he would give the eulogy. But the Plaintiffs are still a little hostile.
In view of the above no matter what you do people will attack. I think you have done enough LLC is plenty good, just be prepared to defend against the slings and arrows of Code Napoleon. Love Louisiana, one of our better buys. Talk about a short sale.
The best Lucius
As a side point for consideration, make sure you are ALL protected from a liability standpoint...insurance-wise. In other words, if the first named insured on your insurance policy is now the one friend (which I assume), make sure the rest of you are named as additional insureds and loss payees (assuming you all have vested interest). The LLC is inherently a buffer for personal liability, but of it (or Y-O-U) aren't insured properly...good luck.
Also, it sounds like you need an attorney familiar with REI to help walk you through these situations. The one that gave you the "deal" on the LLC may or may not be such. Might consider referrals from local REIA groups as well...
Here are some of my thoughts as a layman and not as an attorney or such:
1. I am not as trusting as you are. You don't own the house. What you do own is interest in a management LLC that the owners hired to manage the affairs. There are some contracts that the LLC could use to accomplish what you are doing out of trust, but it isn't the safest way. However, the flip side of this is that if this is your foot in the door then that is great. Work to buy properties on your own now. I'm not sure if this is structured favorably for a bank to look at it but you definatly have experience if they ask, "How long have you been an investor?"
2. From what I understand, Louisana has adopted the Uniform Limited Liability Company Act in which some states have (my state, Iowa, included). This act prohibits foreclosure of an LLC interest. This means that the court cannot award you interest of an LLC to anyone; only the distributions. That is fine because taking a salary from the LLC is not a distribution!
The LLC's assets are properly protected in my layman opinion, however, you stated that the real estate is not in an LLC. Someone claimed homestead on the property, which is good, but typically that will not hold up since the person who claimed it is not living there (Iowa law anyway). The good news is that the asset is protected from you in case you get sued....the bad news is that you don't own the asset! Counter-productive i'm affraid
3. My person asset protection technique calls for nearly every property to be placed in it's own LLC. I would immediately set up another LLC with each of you as 25% interest (or whatever) and then hire the management company as usual. The management company can then get you guys cell phones, business cards, etc...much easier that way. (off topic)
You can simply deed the property to the LLC although there is a concern with due on sale clause. However if you do not default on the mortgage the bank is not likely to care. The bank will likely see it as estate planning or such. I would do it and not worry.
4. Saying that you plan to live in the property when your intent was to rent it out is LOAN FRAUD. There's really no debate on the topic other than if you will get caught or not. Is it worth it?
Welcome to TCI and I hope that you enjoy the stay.
REMEMBER: Persistence is what makes the impossible possible, the possible likely, and the likely definite. --Robert Half