Hello and thank you to all that contribute to these forums. This forum has been a huge factor I’m my real estate investing success. I have been investing in real estate flips, assignments and rentals part time for over ten years now and finally going full time. In the past I have bought and sold in my own name and now I am looking into the pros and cons of setting up an LLC. I’m hoping to get some advice here. Hopefully some seasoned investors can chime in here. Also if I set up an LLC, can I purchase a vehicle and write it off? Thank you in advance for your valued input.
Using an LLC
LLC’s can be single member, multi-member, and you can select how it is to be taxed.
Now, if it’s a single member LLC (just yourself), it’s could just be a pass thru entity, and you would report all your income or loss on your personal return. The rationale here for the LLC is to limit your liability, or so you would assume.
I’ve have active businesses and conducted them thru “C Corps”, “S Corps” as well as LLC’s. Originally I used LLC’s to limit my liabilities, and thought the same of “S Corps”. Then I found out it’s not necessarily so.
A couple I bought a business from had an S Corp. They were sued, the S Corp as well as themselves personally, as I recalled, for over $2,000,000. They had insurance, but I was curious why they could be sued personally. The attorney for my business I consulted asked if they worked at the business in some capacity. I told him that the owner is at the business everyday managing the business.
I was told that in this case, they can be sued personally for negligence, in the management of the business. On the other hand if they were just absentee owners, that would be different.
I assume you are very active in your REI business.
I closely followed the case because some of my employees were called down to give depositions as witnesses. The case dragged on for a while.
The plaintiffs attorney finally asked one of my employees during one deposition if he knew where the prior owners were. My employee replied: “I thought you guys knew they moved to Florida”. When the plaintiff’s attorney heard this, he mumbled, “shit, look like we’re screwed”.
From what I’m told, Florida has one of the strongest homestead laws on the books at the time. All the guy has to do sell the business, and park all his money in his own home. Afterwards, they accepted the settlement offered by the insurance company.
What I learn from this is the best thing to do is to buy plenty of insurance if you’re in an business instead of just relying on an LLC. BTW, the insurance this guy had only covered his S Corp, and the insurance company attorney only represented the insurance company. He had to get his personal attorney to represent himself. Later on I learned that he could’ve bought insurance to cover himself as well, on the same policy for the S Corp.
Conclusion? You need a good insurance agent.
Using an LLC
Duplicate
Estate aspects of using LLC
I want to add an additional thought, the estate aspects of placing a property into an LLC.
My parents bought a small commercial property in 1963 for $25,000. By 1980 the property was worth over $250,000. Though they had not thought of selling at the time, they had offers for the property.
In the late 1980’s I got active in REI myself, heard about LLC’s, it’s liability protection aspects, and recommended my dad to look into it. He then referred me to his attorney, a real estate attorney.
His attorney told me that it wasn’t a good idea, particularly if my dad has no plans to sell it, i.e. holding it forever. If the property was in his name, there would be a stepped up basis upon my parents death. If titled in an LLC, it would not, and the capital gains tax would be considerable.
His attorney didn’t even go into the issue of him being sued personally even if titled in an LLC.
In fact, my mom passed away just 2 years ago, and the property sold for over $1MM. The stepped up basis saved a bundle in taxes, i.e. capital gains on $1MM.
What we did was require the commercial tenants to carry a minimum amount of liability insurance with the landlord named as the additional insured. We ask our own residential renters to get renters insurance to cover risks.
Again the answer was insurance, not an LLC.
Now this was 30 years ago that I looked into it, and I don’t know if estate tax laws changed much on this issue since. I have been following this board for quite a while, since the late 90’s, and have not seen much discussion of the estate aspects of placing properties into an LLC.
Perhaps Bronchick would like to comment on it.
As Franik said if you form a single member LLC then the courts may very well pierce the corporate veil and you will be stuck.
If I remember correctly a doctor and his wife in CO did something and the courts said…Why should the courts protect you from your own problems/abuse?
So, best to have multimember, you and your wife are considere one, LLC.
May Bill Bronchick will weigh in and clarify.