Using LLC In Real Estate??
Hello All,
I have been reading about the benefits of using an LLC to protect one's real estate assets. I thought I understood the rationale but now that I am about to set up my LLC, I am not so sure.
I currently own a property that I have turned into a rental and am looking to buy another rental and a primary residence in the next month. My question is: How does one use an LLC to protect these assets? Do I keep title of all these properties in the name of the LLC? Or do I create a different LLC for each property?
If I do transfer title to the LLC, will the tenants now pay rent to the LLC? I will personally sign on the loans for the property so I will still be responsible for the loans. In all the above scenarios, I don't really see how the LLC protects my assets. If I am sued and am the single member in the LLC, Can the plaintiff still go after my assets that are in the LLC?
Maybe I am just looking at this from the wrong perspective. I would appreciate if anyone could enlighten me how best the LLC can serve the real estate investor.
Thanks in adavance.
JS.
An LLC shields you from personal liability with respect to the property owned by the LLC. For example, if someone gets injured on the property, they can only go after the LLC for what the LLC owns (i.e., they can't come after your personal assets, including personal residence). Depending on the value of the properties you are buying, you may start an LLC for every 1, 2 or 3 properties (I try to limit my liability in each LLC to approx. $100,000) so I put each house in a different LLC (i.e. 123 Main LLC, 888 Madison LLC, etc.)
Spoons23, Thanks for your insight. I still have a few more questions. By putting each property in it's own LLC, can't the plaintiff still come after that particular property?
Say a tenant is hurt at 123 Main St. which is owned by 123 Main St., LLC Can't they still come after the full value of 123 Main Street to meet their settlement? Also, as a tenant, Are they renting from you (a member/owner of 123 Main St, LLC) or are they renting from 123 Main St, LLC? What about the due on sale clause when a property title is transferred?
Thanks for your help in gaining clarity about this issue.
JS.
Yes, they can still come after the property in the LLC (you can't shield everything). But the point is, you will have insurance for that and that is ALL they can come after. They can't bankrupt you. As far as renting, the agent or payee can be anybody you want as long as the single member of the LLC authorizes them to be paid the rent. Not sure what your question is re due on sale clause.
Thanks for your responses. I guess that I was wondering if the due on sale clause on a mortgage can be triggered when the property is transferred to an LLC.
Another question I have. If, as a single member of an LLC, one should incur personal liability and get sued, can the plaintiff in that situation come after the assets of the LLC? Sounds silly I know, but take for example if I owned property thru my LLC. If I was to get into an accident and didn't have enough insurance, could the injured party come after my property that is in the LLC.
Thanks again.
JS.
I'm not sure if someone can come after your share of an LLC in a domestic liability claim or not. What the LLC protects is your liability in the event you get sued on that or those properties under the LLC only! They can't get your car your own house or your savings. Do you have to pony up to your wife in a divorce or can the guy your ran over with your car get your share of the LLC I don't know but that is not really the point of an LLC in rental properties.
For One question it is easy to get an answer. But for this many questions at this deep a level of detail, dont you want to ask a lawyer?
Just in case someone on the website who sounds totally credible and trustworthy but is still incorrect?
All that being said.
OF COURSE THEY CAN SUE YOU!
I can sue you right now. Because you gave me a dirty look. I'll just call it something that sounds really legal and believable.
I wont win anything. But I can file a suit.
I also wont win if I sue your LLC for a personal liability that you ARE responsible for.
If I get hurt on your property, I sue the owner of the property. YOU CANT GET AROUND THAT. But you can make it so that an LLC owns the property and NO OTHER ASSETS.
Then you fight out the merits of the lawsuit in court but the claim they can get is usually capped at the amount of the assets in the LLC.
They can certainly sue you personally. The protection comes in when you have set up your corporate entity correctly and your lawyer is very capable.
The lawsuit against you personally will end as only a nuisance that costs you legal fees.
But people can sue for any reason.
So you have 5 houses held in 5 different trusts or 5 different corporations (LLCs included). And you keep your personal assets in your name or a 6th separate entity.
Now, when Someone has a problem with 123 Main Street they will only be successful suing that LLC. The others are owned by different entities with different names so it wont even be easy to find all of the things that YOU OWN an interest in.
hope this helps.
gl
Neill
Neill,
You are right about getting a Lawyer. However, I have heard that some lawyers and legal services will vharge much lower fees if you do majority of your paperwork yourself and then just have them review and make necessary corrections.
This is what I intend to do with setting up this LLC that is why I am asking all these questions here rather than to a Lawyer. Once I have my credible game plan, I can then present it to my Lawyer for final review and approval, but I avoid paying too much in the initial statges of setting up the LLC.
Thanks,
JS.
I am also interested in setting up an LLC for my investment partner and I. What is the general cost of setting one up?[ Edited by bluefox1081 on Date 02/23/2004 ]
Here are some basics I posted earlier in regards to the same question that often appear on TCI:
" While LLCs and S-Corporations are both taxed as so-called "pass through" entities, the S-Corporation is strongly discouraged for the ownership of real estate because S-Corporation shareholders may not be able to maximize their depreciation deductions.
The reason for this potential pitfall is because the amount of tax loss that may be used by a shareholder or a LLC member is limited to the member/shareholder’s tax basis. The tax basis of shareholders and LLC members is computed very differently. For a LLC member, tax basis includes debt, but debt is not included in the calculation of tax basis for a shareholder of a S-Corporation.
In addition, while S-Corporations are limited to a single class of stock, there may be more than one class of economic interest held in the LLC, thus permitting special allocations of income, loss and cash flow among the members.
Finally, while an S-Corporation cannot include more than 75 shareholders, and permitted shareholders may not include corporations, partnerships, non-qualified trusts or foreign shareholders, none of those limitations applies to LLC's."
I have seen online LLC filers charge as little as $100 plus filing fee. The Lawers here in GA charge between $500-1000 depending on what level of service you want. Setting up an LLC in GA is very very easy. I got a free consultaion from a lawyer in town then did it myself in a few minutes.
I always use www.thecompanycorporation.com. Usually takes 10-15 minutes. Cost, I assume, varies by state and entity. Tim
Another good place to incorporate or form a LLC in ANY state is: http://www.smallbizincorporator.com/
Beside that, they are somewhat cheaer then Company Incorporated for the same type of service.
Final option: Google "Forming LLC" and pick your own winer.
Good luck !
When setting up an LLC for real estate you must have a basic understanding of the proper jurisdiction and taxation. Although you can use cheap incorporation services such as those mentioned herein, I would caution anyone against going this route initially. For instance, will your LLC be taxed as a partnership, corporation, or ignored for federal tax purposes? Will your operating agreement reflect your tax classification? What are the annual franchise fees? Etc.. There are many considerations that are not addressed when you go with a "do it yourself" type service. I have set up several thousand LLCs, LPs, and Corporations and depending on the client, several options exist. The LLC is a great tool for real estate because of its unique tax and asset protection properties but without proper legal guidance you plan could be worthless.
Sincerely,
Clint Coons, Esq.
Quote:
On 2004-02-20 02:39, smithj2 wrote:
If I was to get into an accident and didn't have enough insurance, could the injured party come after my property that is in the LLC.
I read about this in the book Real Estate Loopholes by Dianne Kennedy and Garret Sutten (Rich Dad Advisors). In most states the best the person sueing you can get is a charging order against your LLC.
This essentially means they get non-voting, non-managing membership into your LLC. They cannot dissolve it or distribute its assets. Therefore, the most they can do is collect any profit...but as the manager, you'd first have to decide to actually distribute profit instead of re-invest it back into the business.
The bigger catch here is that they would become responsible for paying the taxes on this phantom income that they did not actually receive. Most attorneys and creditors would foresee this and decide not to pursue it. They would rather find an easier fish to catch! Even if they did still pursue, they would have a very difficult time actually getting anything out of your LLC, other than a tax bill from the IRS!
Once again, I speak not from experience, only from what I read about.
I have a couple of units but not in an LLC. I am beginning a new enterpise that I will put in LLC. Have been looking at the cheap on line offers and was almost ready. Glad I stopped here to nite. The other considerations that an Atty would address are beyond my scope. It would be a real shock to think
my diy LLC had me covered when indeed I was Not!