LLC Question
I just bought my 4th rental yesterday -now have 13 units total and asked my atty about protecting myself possibly w/an LLC. He said he knew someone who cound write one up (do the paperwork) for about $2500 but he said I might be better off carrying adequate insurance 2 mil +plus under an unbrella or incorporating. I might get maybe 2 more prps ( 6 units) and call it quits as I work PT and go to nursing school and have a large family . I do not use real estate to get rich on but just for a few extra bucks and hope it will pay for 5 kids 'college------I hope.[ Edited by jenkie01 on Date 02/28/2004 ]
Ouch, consult another attorney? LLC not a bad way to go but needn't cost that much. You can buy an LLC online, set up with standard boilerplate valid for your state, at websites like www.IncorporateTime.com (and others). They charge approx $200 - $300 for most states, apart from a few states like Massachussetts which have high state filing fees. Then customise your new LLC for your needs. It's not all that difficult, lots of online info at places like Nolo.
I will ck nolo out now, I assumed it was something that had to be handled by and atty. My atty is very, very rreasonable n his fes and also a good friend and from what I hear a pretty good atty to boot, but he said this is kind of a specialty area and he does not do it, nor did he want to start, But if I do carry adequate insurance,which I do anyway, do I need additional protection of the LLC or INC??
An LLC or corporation will provide the ultimate protection for you because only the assets of the LLC/Corp will be at risk.
Carrying a personal umbrella policy does not guarantee your personal assets will be protected should any lawsuit ensue.
An LLC is probably better than a corp for 2 main reasons:
1. The profits or losses are passed directly on to you.
2. The structure of an LLC is less rigid than a corporation. A corporation requires certain positions (President, secretary, etc.) and usually requires some sort of regular meetings with minutes that need to be taken.
If you have mortgages on your properties, you'll need to get permission from the bank to hold the deeds in the name of your newly formed company. You're better off asking an attorney or searching this forum for more details on that.
Thanks much, I will see my atty tomorrow, as he has most of the final in my business dealings, but he is not against me doing something myself---if it is something that he does not handle....such as an LLC, Thanks again
own an llc or s corp and put everything into a land trust in the corps name.
You could probably save a bundle by looking at your state's (which is...?) website--specifically, Secretary of State--where you might find, as I did for Minnesota, that the LLC rules and forms are there for all to read, download, print, and submit. If you were to print these forms, fill em out, and bring em to your lawyer for review, she might be a little upset at losing out on most of the 2.5 fat clams, but would be impressed that you know the shortcuts.
Does anyone actually have any statistics that state what the statistical out come is when an rental that is owed by an LLC is sued???? I highly suspect the corporate veil is peirced and the LLC provides you with very little protection. I would rather look it in the eye and carry liability insurance.
He paid a good lawyer and the lawyer is telling me to get insurance. Does that tell you anything?
My state is Pa. I spoke to atty today, he said I can do it myself, but he said I should look into it further and so would he, Depending on the cost , He said I should carry at least 2 mil in liability -I already have 1 mil as wife is a delivery room nurse people are always sue happy. That would be 3 mil total under an unbrella policy. I also must call my insurer to see how much more 3 mil would be compatred to one. He still seems to think that the cost of ins is cheaper than the LLC> I am just starting to search for how to do it myself---just a little unsure thats all
I am in the process of evicting a deadbeat tenant. I work full-time and I have very long hours. My wife handles the REI part. Both our names are on the deed. Can I transfer ownership to a LLC and then let her handle it so that I don't have to appear in housing courts during a work week? Or should I just transfer the deed to her?
$2500? In Kansas you can do it yourself for under $200. An LLC for each rental under a corporate entity and your getting a future, get some other pro help. A lawyer that can't do an LLC must be old school and not updated in the last 14 years. Kansas you fill out your LLC name and address of resident agent(yourself or lawyer, CPA, and $165 fee and that is it.
Quote:
On 2004-03-03 13:56, ahmedmu wrote:
I am in the process of evicting a deadbeat tenant. I work full-time and I have very long hours. My wife handles the REI part. Both our names are on the deed. Can I transfer ownership to a LLC and then let her handle it so that I don't have to appear in housing courts during a work week? Or should I just transfer the deed to her?
Dont need to do all that.
Just have both your names on the lease as "and/or" and either one of you can file the paper work and appear.
Anyway the judge should only look at the lease and wont even see the deed.
bgrossnickle,
Why would you say the veil would likely be pierced on an LLC? There is plenty of case law that says corporations and LLCs alike give their owners liability protection. As a shareholder of Phillip Morris in the past I'd be pretty worried if that weren't the case. But, like Big Mo's execs, you as an owner/operator of an LLC need to respect and follow certain procedures to be afforded this protection.
But, maybe just as I do, and you may also be suspecting or alluding to in your question, many people who have LLCs (especially Mom and Pop operators in the RE area) don't do the things necessary to protect themselves.
You still have to do things like properly form your LLC, it's a good idea to have an operating agreement (though not necessarily required), it's imperative that you don't comingle funds b/w you personally and the LLC, your assets should be properly title in the LLC's name (or maybe as beneficiary of a land trust), etc. Corporations have additional requirements such as holding shareholder meeting and keeping minutes and details of major decisions, etc. but LLCs have the advantage of not requiring these. Though, it's not a bad idea in order to maintain good relations with your partners (if you have any) to keep track of these things too.
Hey
Have you heard about Land trusts as a way of holding property and providing privacy. Each property can have it's own trust with a trustee who can revel who the onwer is. look it up on google
As an attorney you will probably assume I am biased toward my brethren however, let me briefly elucidate this topic.
A LLC is a legal entity that you establish to provide asset protection in the event of a lawsuit. Why do you want to save $1200 or so by doing it yourself. I typically refer to this as the "I will perform my own oral surgery because I read a book on it". I have seen numerous clients with do it yourself LLC's and there is a common thread amongst all of these documents ... very weak and most likely will not protect the client. There are many issues that need to be addressed when establishing an LLC and an online kit for 300 will not do the job. If you set a structure up properly the tax savings alone will cover your attorney fees in the first year. Asset protection planning is not an area where I recommend people take shortcuts.
Respectfully,
Clint Coons, Esq
Quote:
On 2004-03-01 20:58, bgrossnickle wrote:
Does anyone actually have any statistics that state what the statistical out come is when an rental that is owed by an LLC is sued???? I highly suspect the corporate veil is peirced and the LLC provides you with very little protection. I would rather look it in the eye and carry liability insurance.
He paid a good lawyer and the lawyer is telling me to get insurance. Does that tell you anything?
The coporate veil would be peirced almost solely in a single member LLC as there is only one decision maker. If there are multiple members to the LLC then you are much safer to have an LLC.
With respect to an LLC, what other options are there other than the option of being taxed as a corp. vs. a partnership that could yield differences in taxes?
Might one thing have to do with self employment taxes and whether the LLC is set up as member- or manager-managed?
With a partnership, the income/loss simply flows through to the owner so, I can't think of anything that would cause differences (other than different accounting decisions) that would create differences in taxes.
What are some examples you're thinking of?
Real estate is by definition a passive activity and merely setting up an LLC will not change that classification in most situations. The LLC will provide asset protection, provided it is set up correctly, but no tax savings. To reduce taxes, I generally recomend a management corporation to manage the LLC. The corporation is the business that receives active income and hence tax deductions for my clients. This combo strategy can dramatically increase the depreciation flow thru deduction if structured properly.
Respectfully,
Clint Coons, Esq.
That is the biggest ripoff I've ever heard of. All you have to do in KY to set up an LLC is print out the Articles of Organization form online and fill in the blanks. Send the form in with a check for $40 and you have an LLC. I know some states differ in their price to setup the LLC, but at the most it may be $300. Get on Nolo's website. They have great info on how to set up an LLC, including boilerplate forms in case your state does not have one.
I can't believe that attorney had the gaul to try and charge you that much. What a jerk!
Clint,As a former practicing attorney I agree. Even though it will cost more to have a professional set up the llc,you will have some assurance that it was done properly.
"This combo strategy can dramatically increase the depreciation flow thru deduction if structured properly."
Clint,
This sounds like a good idea. So, to clarify, you'd have the LLC be manager managed and have that manager be a corporation? But, you say the corporation gets the tax deduction. Do you mean the depreciation tax deduction? Maybe that's not what you're talking about but if it is, how could an entity (the corp) that's not the owner of the property take depreciation on the property?
I guess I don't understand the structure you're proposing.
I echo what Clint has to say (we attorneys have to stick together). I would only add that you may want to consider a few options on how to best protect your assets. A single LLC to hold all of your properties puts all of them at risk if there is a lawsuit filed with respect to a single property. Some investors hold properties in separate entities to isoloate the liabilities.
Another downside to the boilerplate LLC's is that they are not specifically designed for real estate investments. There are certain clauses you will want to include relating to tax matters for real estate and for asset protection. If you are sued personally, your LLC interest can be included in part of the judgement against you, though the assets themselves are protected. With certain language in your LLC operating agreement, you can make it extremely difficult and often times undesireable for a plaintiff to want anything to do with your LLC that holds your assets. This is why you go to an attorney and pay up to $2500 and not pay $500 online for a generic piece of paper you can find online for free if you look hard enough.
good points, what kind of verbage should someone put in their llc to make it more foolproof??
also do you need an operating agreement?? Thx.
I have found attorneys to be absolutely essential in many cases. To me, however, it seems that setting up an LLC for a duplex owned by your typical small scale landord would be such a common task that little research would be necessary. Also, it would seem that this is such a common scenario that one could find documents that contained all the necessary language to properly set up the LLC and effectively protect assets.
Why would a lawyer need to charge $2500 for this service? Why would you even need a lawyer to do more than just check over your LLC?
I am considering setting up an LLC or individual LLC's for my properties, so this is an intersting discussion for me.
I found "Wealth Protection Secrets of a Millionaire Real Estate Investor" by William Bronchick to be very helpful. The book is a paperback and lists for $18.95. A land trust is a revocable trust and provides privacy, an LLC provides limited liability. Using LLC's with a Family Trust is a good way to go. However, it may be difficult to obtain liability insurance and an institutional lenders may not want to allow your LLC to hold rental property. So I am having difficulty obtaining liabilioty insurance. To insure the property under a commercial liability policy more than doubles the premium. I am keenly interested in learning from the experience that other members have had in obtaining insurance with the LLC as named insured and with lenders. Does any Insurance Company focus on landlords? I have never had a liability claim, but rates keep goinf up. How do you keep insurance premiums reasonable? How have you fared with lenders? Thank you for your response.
What ever happened to the EXCULPATORY CLAUSE to prevent legal action against personal assets?
It seemed common in RE contracts for wealth builders a few years back. Could it not serve well with an LLC, or even without?
Alan
I think Biggrossnickle is probably right. The LLC or the corp will provide a certain amount of protection but if you get in real trouble not that much.
I got sued once for $10 million in a wrongful death/personal injury case. Bottom line it would have taken a few months to pierce the corporate veil. I was manageing the property, if there was mismanagement I was liable. Your phillip Morris example is not relevant unless you are the sole shareholder and president of the company.
I've also had corporate identities which held up. but they tended to be in small cases or very old corporations where there was a history of corporate meetings and records.
Fortunately the wrongful death case settled for the limits of my insurance policy ($1 million at the time-- now I carry more).
After property is owned by LLC has anyone had difficulty obtaining liability insurance? Was the premium the same as if you, an individual, had been the named insured instead of the LLC? How can an investor best get insurance coverage with an LLC as named insured?