After some research and talking to a CPA, I’ve decided that both of the businesses that my fiancee and I will create will be structured as multi-member Limited Liability Companies (LLCs), and that they will likely be taxed as S-Corporations (LLCs can be taxed as any other corporate or partnership entity). I will own 51% of the real estate investment company and my fiancee will own 51% of the communications company.
While I’ve set up corporations before, I’ve never done so in Georgia (where we will be operating), and I’ve never started a business that would provide as much legal exposure as my real estate company will potentially have. So, instead of setting up the companies myself this time, I’ve decided to spend the money to have a law firm — who specialize in incorporation in Georgia — take care of filing the Articles of Incorporation and other forms.
While having the firm do this isn’t cheap (around $400 per company), the peace of mind it provides in this case is worth the cost.
I submitted my information for both companies to the law firm today, and I expect that the companies will be fully set up by the time we get to Atlanta in a few weeks.
I’d be curious if you shared with us what they provide you with when it’s all said and done. I had an s-corp once that I used a legal service for (www.legalzoom.com). Other than the fancy binders and stock certificates I got, after looking over the paperwork I quickly realized that they really didn’t do anything that I could have done on my own, by following simple instructions on the state’s website.
I live in Maryland and am about to form an LLC for real estate investing (without the help of an attorney). I currently have an S-corp that I used for doing side work, that I will let expire come 2009. I am in the same boat as you only:
1. I haven’t quit my day job
2. I’m just now in the start of my quest to get into real estate investing
I currently work as a computer programmer (web developer), so we also share similar backgrounds. I look forward to following you on your journey and hope to share my experiences as well. You may want to consider setting up a discussion forum at some point as your reader base grows.
Hey Don…
I absolutely agree that it’s much cheaper to do the incorporation yourself, and if I was already settled in Georgia, I’d probably do the research and do it myself.
But, we don’t head out until next week, and I’d really like to have the businesses set-up by the time we get settled, so it’s worth spending the money to get it done right and get it done quickly.
Specifically, what the firm I’m using offers for the price is:
– Do a business name search
– Create Articles of Organization
– File Articles of Organization
– Create Standard Operating Agreement
– Forms and memorandums for all other necessary filings
– Binder, Certificates, Company Seal, etc.
I’m going to need to create separate LLCs for each of the properties I intend to buy, and I will certainly set those up myself when the time comes.
Hello-
First off, this is a great blog very informative and I’ve just started reading!
I do have a question, and you may go on to explain it later but you started an LLC company and you need to make LLCs for every property? Is that because you are working with apartment buildings or would you have to do it with any property?
Thanks and keep up the good work!
Casey –
LLCs are NOT needed for every property. If I wanted I could put multiple properties into the same LLC. The risk of doing that is that is that if I got sued, it would actually be the LLC getting sued, and all the properties in that LLC would be at risk of being lost.
Does that make sense?
Yeah, that makes sense. Thank you!
Would it be possible to shed some light on the break-down of company ownership; you owning 51%. I take it you’ve established and investment group. Also, you’ve established a communications company; what are their functions in regards to your REI company.
Thanks,
Rob
Hi Rob,
My wife and I own several different companies — two of them are real estate related. The main company focuses on the buying/rehabbing/selling of property; I own 51% of that one and my wife owns 49% of that one. The other company focuses on helping other investors with their buying/selling/staging; my wife owns 51% of that one and I own 49%.
This is just the way we’ve decided to set things up when we started; we don’t currently have any other investors in our businesses.
I have been wondering why several investors have mentioned that they are setting up individual LLCs for each property they invested. Thanks for the explanation. Follow up on the answer, will all the LLCs be somewhat related? By that I mean what will be the relationship between your main company and all these individual LLCs? If the owner ever get sued, won’t ALL the companies he owns get sued, and therefore all the properties are at risk of being lost as well?
Also, since your business is fixes and flips, so I assume once the property is sold, the LLC is considered inactive/expired? In that case, do you feel it is necessary/beneficial to have similar setup for buy and hold type of investment?
Sorry for lots of questions. Great website, and thanks for sharing so much with us!
Hi Sophia,
We ended up creating a single LLC for all of our fix-and-flips — because we generally only have a few deals going at a time, we are comfortable having all the properties in the same LLC. On top of that, we have separate LLCs for each rental property we hold. These LLCs are all unrelated (separate entities), so if one gets sued, there is no risk to the others.
Thanks J! Just to clarify, those LLCs for rentals are not considered to be related to the master LLC where you hold all your fix-and-flips, correct?
Hey Sophia –
That’s correct. None of the LLC are related in any way (except that we own them).
I work as a real estate paralegal and part time investor yet I don’t have a total grasp of the LLC thing – even though I own a few.
It’s my understanding that one can not escape personal liability for negligence by placing a property in an LLC. So, if someone slips and falls, for instance, we may still be personally liable. Have you any thoughts on this?
Hey Mark –
Yes, that’s true…if there is negligence on the part of the LLC member/owner, it very well may not shield him from personal liability. But, negligence (I’m guessing) is going to be a rare occurrence. If someone slips and falls, it’s unlikely that’s due to negligence on the part of the business owner, unless there were obvious steps he could have taken to ensure the slip/fall didn’t happen. More times than not, it will be negligence on the part of the contractor, which may still be grounds for lawsuit if it happened on the owner’s property (even though it was the contractor’s fault). In those — more common — cases, the liability protection was very important.
This is my understanding, though I’m certainly not an expert on these types of legal issues, so don’t take my word for it! 🙂
Reading some of the above makes me feel that perhaps the prior career working for one of the big-4 accounting firms doing corporate taxes wasn’t a waste after all! I just came across this outstanding site and blog today so I’m just trying to envision/understand the complete org structure you have built…it sounds like you have independent LLC’s for each rental property owned…are these each SMLLC’s flowing directly to you? I assume your CPA handles the corporate and LLC level tax filings for your companies, out of curiousity do you outsource the entire bookeeping functions of your operations?
Looking to follow a similar path you seemed to have taken and look forward to reading and gleaning more knowledge and experiences!
Hey Shawn –
I actually have one LLC for my property flipping and separate LLCs for each rental…there is no relationship between the LLCs.
I have an accountant who advises me on how best to structure for tax benefits, and he does all of our tax preparation as well.
I do all the bookkeeping (QuickBooks) and just provide my QB data to my accountant when necessary.