Starting a LLC?

[jezter6]

I don't know that this is the right place, but I figured if there was any place to talk to a lawyer, this is it.

I have a group of friends looking to go in with me to start a (very) small real estate investment company. Basically looking for some good deals we can get fairly cheap and rent out while the price is low and hoping to sell high in maybe 2-3 years. Right now, the thought is 1 property to start, with the possibility of using the income from the first property to fund a second in about a year to 18 months if things are still going low.

Basically nothing more than about $4k each, something I'm ok to gamble with.

In any case, I'm looking at forming an LLC on the quick and dirty and cheap. I was looking at legalzoom, and it's quite expensive and have seen some rough reviews. There's also a number of "cut rate" sites out there that do the same thing for about half. I'm just not sure what I need to add-on to some of the a la carte options.

Does anyone have experience using an online "LLC Creation" site that helps you file all the paperwork? I've contacted 2 lawyers, but I'm guessing that the fees under them will be as much or more as legalzoom, so I'm not sure I'm really saving anything by doing it that way...I just don't want to try and navigate all the forms myself without someone to talk to.

Has anyone done anything similar in the past and have experiences they're willing to share about companies like this? (the LLC creation part)

[chuckygee]

I do not have any recommendations for sites, but I do have some business advise.

How you structure your LLC at the beginning will be very important. You need to decide several things:

1. Who are the members?

2. What are the ownership percentages?

3. Who has voting rights and with what weight?

4. How are funds added to the LLC if needed, and how are profits distributed?

5. If one member leaves for whatever reasons; separation, death, whatever, how is that portion of ownership dealt with? Is it inheritable, sellable, or are the remaining members required to buy them out?

6. Who will handle the banking and tax issues?

7. Who can authorize the purchase and sale of property?

8. Getting and maintaining insurance coverage.

As you can see with this short list, the reason it is complicated (read expensive) is these issues need to be resolved upfront.

Unfortunately friends and family usually do not make good business partners. All of the things that you think are not an issue now, becomes a HUGE issue, once either money starts flowing in from profits, or money starts flowing out because of obligations.

After all the negative talk, Good luck. If it is done right, it can be a great opportunity.

[jq26]

I set up an LLC recently using the online forms provided by the state. I did a state name search, then reserved it, then contacted the IRS to get issued an EIN, then completed the state forms. You then send in the paperwork with a check to your state. The state stamps it and sends it back to you.

http://smallbusiness.findlaw.com/business-structures/llc/forming-llc-checklist.html

Regarding your prospective LLC, put together a decent operating agreement so that when you disagree or one party wants out, it doesn't become a free for all involving lawsuits (they almost always end in this without an operating agreement in my opinion).

Just a few words of advice and I don't want to sound like a wet blanket here. First, plan on owning rental properties for at least 10 years. we are in a flat to slightly downward pointing market and could even see further declines. When you factor in the 3-5% of the cost to get into the property (mortgage costs, title insurance, real estate transfer tax) and then you factor in the 8-10% of the property cost to get out of the property (real estate transfer tax, realtor's fees, tax certifications, etc.), you are looking at 11-15% of the property value. In this environment, it could take 5 to 10 years to see 15% appreciation. Second, you are going to have a difficult time having lenders lend to an LLC directly. Ordinarily, you buy the property in your name, have the mortgage in your name, and then you transfer the property to the LLC after the fact (and notify the lender). They will not lend to an entity with little assets and no income. At a minimum, you are looking at personal guarantees.

Third, it is very tough to make money at this. What rental properties are really great for is to shelter income from taxes. Your depreciation expense will likely gobble up any net rental income" and create a substantial loss for tax purposes. Subject to at-risk rules and passive activity loss limitations, you can shelter a boatload of income using rental property "losses". So on a cashflow basis, you'll be slightly positive (at best). But your tax capital accoutn will be highly negative, and that'll pass through to shelter your W2 income. HOWEVER- you must reduce basis of the property by an amount equal to the depreciation expense, so when you finally sell the property, there is unrealized 1250 gain (ie you pay much more tax later at a fixed 25% tax rate).

You also want to make sure that you separate everything and don't do any work yourself if the point of LLC is protection of assets. If not, the LLC is pointless because you will all be sued personally. So for instance, you change a light fixture in the home and then a year from now a fire starts and a tenant is injured. The tenant then sues the LLC and YOU PERSONALLY. Also make sure you carry a blanket liability policy. I carry a $1,000,000 policy for $290/yr. It is worth its weight in gold.

Also keep in mind that LLC protection is one directional. You may be able to protect personal assets from LLC liability. But you cannot protect your LLC assets from personal liability. In other words, if you are driving on the road and you slam into someone and put them into a wheelchair, if they receive a judgment, execute an asset search, and then opt to levy, the judgment debtor may be the new owners of your portion of the LLC.

Find a really good accountant as well. Your LLC will have to file a return and then each member's respective share of tax attributes are reported to each of you. It costs me about a $1000 to have my tax return done every year and my rental is single entity ownership (ie much simpler).

One last thing- don't even think about getting involved with rentals until you read John T. Reed's books on the subject. He is the BEST in the business. It is required reading by anyone even entertaining the idea.

Best you and your group iof investors think about these things now...

Edited September 8, 2010 by jq26

[jezter6]

How does the personal guarantee work? Is it that one of the LLC members is also on the mortgage as a co-signer WITH the LLC? Does that follow the same mortgage process as an individual mortgage?

I'm trying to minimize risk to all the members, and I don't know that any one would want to be personally responsible while the rest of us are only responsible to the LLC.

What about income? If we start the business now, and work on a few things that would show a minimal income (maybe $600-1000/mo), how much would that count?

Also, if we walked in with a signed lease (with a clause that says it's only valid if the closing goes through), will that count for anything? I think I can have a renter lined up in advance.

[jq26]

You have to do the leg work and get on the phone with about a half a dozen banks. Particularly today, banks are not excited to lend to businesses without years of proven income with tax returns. Additionally, you'll pay a huge premium on the mortgage because this will be considered commercial lending now and not residential. Call around. The loan officers will give it to you straight.

All I can say is you are expressing an idea that tens of millions in this country have had. Most never do anything when they realize the expense and trouble they need to go through to make it happen. And of the ones that did go through with it, in the past five years many of those people have lost hundreds of thousands of dollars as the power of leverage worked against them. So be careful and read, read, read before you do anything.

[2ndTimeAround]

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My $00.02 on creating a business.....

If you want something done right, you got to know how to do it correctly.

Set up my LLC up with a generic name over the summer, took about four months. Having all the required paperwork filed correctly, plus paying all those little fees. Hired a company to register my LLC. They did all the work for $800. If I'd lived in another state, might of considered doing it on my own. Here in New York State lacked the knowledge to correctly do this myself.

Aside from all the laws - New York is one of a handful of states that has a publication requirement. The state requires the LLC to publish in two newspapers about the company in the county in which the LLC is located. The publication has to have a certain number of readers, and it has to be listed for 120 days. Which then needs to certified. Kinda stupid if you ask me, compared to how easy it is to set up LLC's in other states.

Here's a good link that describes LLC's in your state. Your state looks pretty easy to flile. http://www.residual-rewards.com/marylandllc.html

Back in the early 90's had a successful corporation, which came to a sudden end due to 9/11. I think I paid somewhere around $350 to form. One thing I didn't like about corporations, was having to file a separate personal and corporate (2) tax returns. Sure the tax savings was good, my accountant wanted $1200 to create a mountain of paperwork each tax season. With a LLC - your personal and business expenses can be filed on one tax return.

If I do nothing about actually creating a company, planning to take advantage of all the write offs and tax savings.

I have so many opportunities on my plate right now, short term have put a hold to creating a company because I am so spread out.

Originally was going open a maintenance company for ROE homes (bank owed homes lost to foreclosure). Had contractors in different states ready to work, had a list of banks reps to speak to. This type of business is too much to run by oneself - had a partner, dropped them after our first disagreement.

Met with a couple of months ago with attorney friends in New York city. We discussed opening up a loan modification company (it's going to be till 2012 before we get out of this recession and the modification market is going strong). Spent a week creating a business plan, used Craig's list to collected resumes, was really considering. All the years I wrote creating loans - the last three years dissecting loans, am So'oooo burnt out on mortgages. Rather then dealing with all the headaches, it is best to work as a contractor for an honest company.

After I received my LLC license - opened a business checking account at Chase bank. I have been approached about opening up a debt resolution company. Several of my old mortgage clients want me to negotiate what they owe on credit cards. It would be very easy for me to act as a trustee and have them make deposits directly into my business account. Still need to research more about licensing and NY laws, plus create the require paperwork.

Last month was planning to be seriously involved with Principle Reductions. Over two weeks learning how the PMR's worked. This is a really big scam, because the government realicated the money for the TARP funds. That were going to paid back in the form as rebates, to Lenders giving the principle reductions. By taken that money away, there is no incentive to make a PMR work. Waiting for the big announcement in October from the Treasury Secretary about next "new" program. The problem with our current government - all they are doing is putting band-aid to fix problem, then putting a bigger band-aid over the previous one

Whatever company I create - rather than letting someone doing a sloppy job on a simple website, want to create a my own web site with flash and an unlimited number of meta-tags to optimizing search engine placement. My goal is to have a competitive edge on the Web. I have my domain name, and have a host company lined up..

Back when I had my first company, tough myself HTML/CSS and created my own website using MS Front Page. After my site was built, business went crazy.

Within a year - my one man company grew to 48 people working for me. A few years later hired a professional website firm to do a make over. Before was getting almost 2000 hits per month, after it was redone the number of visits went down to under 10 per month. Looking at the source on the home page found the problem. The meta-tags listed didn't even relate to the type of business I was in. I was pissed, had to redo all of their mistakes.

Again if you want something done right, you got to take matters into your own hands to make it the best it can be. Especially when it comes to advertising a business. In today's economy - you have to always keep our options open, looking for new opportunities.

Good Luck

:!:

Edited September 9, 2010 by 2ndTimeAround