Peter, Home Buyer in Sacramento County, CA

Setting up an LLC for real estate investing

Asked by Peter, Sacramento County, CA Sat Feb 19, 2011

Can someone tell me how I would go about setting up an LLC. for real estate investing? I've heard it's difficult to get financing after creating an LLC and if this is the case, can you buy a property with partners then transfer if over to the LLC?

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8
Hi Peter,

Sue has just saved you a TON of work, expense, and liability exposure (TU Sue)!

Linda also brings up an extremely import topic which should have you thinking twice about incorporation, that being "Corporate Veil" protection. While incorporation can protect an individual from liability, there is a "Mythconception" that just incorporating protects you from liability. In fact, ALL that is required to lift the "Corporate Veil" is not acting in the proper manner for which a corporation should act (.i.e., annual shareholder meeting, keeping meeting minutes, taking significant action without prior approvals, following the bylaws, etc.). Do not underestimate the amount of time it takes to “do it right”.

http://www.businessdictionary.com/definition/corporate-veil.html defines the "Corporate Veil" as follows:
Legal concept that separates the personality of a corporation from the personalities of its stockholders (shareholders), and protects them from being personally liable for the firm's debts and other obligations. This protection, however, is not ironclad or impenetrable. Where a court determines that a firm's business was not conducted in accordance with the provisions of corporate-legislation (or that it was just a façade for illegal activities) it may hold the stockholders personally liable for the firm's obligations under the legal concept of 'lifting (or piercing) the corporate veil.'

If you still want to investigate a LLC I would suggest a review of:
http://www.laughlinusa.com/LLC.asp
http://www.laughlinusa.com/incorporating-intro.asp

Personally, I would favor the wisdom of Sue’s experience in the matter.

Best, Steve
1 vote Thank Flag Link Sun Feb 20, 2011
I can share my own experience in this and show you the 'black hole' you can get yourself in to.

I wanted to purchase resl estate and have it set up as a separate business entity. My objective was to secure wealth so it was not a target for frivolous lawsuts, allowed proper succession to my beneficiaries on my passing, and gave general control outside of my personal assets, thorugh a defined plan.

The challenge is that the federal laws relating to S corporations and LLC's do not coincide with CA laws relating to thoee structures. What my corporate attorney established was contrary to what the CPA said should be set up. The simplest solution was to have properties purchased under my own name, securing an umbrella insurance policy. I could then move them in to a family living trust. (Call Ed Cook, CPA at (916) 705-4958.) My original structure was properties owned by an LLC, that was owned b a family limited partnership, that was owned by my personal trust. It needed to be maintained, which was costly, and totally confusing....but that's what my 'wise' attorney set up.

In all cases you need to finance under your personal name, or even as a corporate structure, give personal guarantees anyway.... talk to a CPA like Ed first. Make sure you understand your objectives, and go the simplest route. Setting up an umbella insurance policy under your own name might be easiest and least expensive. It's what many active investors do.
Web Reference: http://www.suearcher.com
1 vote Thank Flag Link Sun Feb 20, 2011
I appreciate your sharing of experience and am glad to hear someone affirming what I did. I thought about the various structure you mentioned and ended up purchasing and financing properties under my name, with an umbrella policy.
How much coverage of umbrella did you end up getting?
Flag Fri Mar 15, 2013
Use legal Zoom to set it up, it's easy. They will explain everything and file it for you as well. However, each state has different prices when registering an LLC.
0 votes Thank Flag Link Mon Jun 30, 2014
Steve,

Your comment, "ALL that is required to lift the "Corporate Veil" is not acting in the proper manner for which a corporation should act (.i.e., annual shareholder meeting, keeping meeting minutes, taking significant action without prior approvals, following the bylaws, etc.). Do not underestimate the amount of time it takes to “do it right”. ... is right on target. Thanks for elaborating. This is very true and something worth taking into consideration.

Peter, I have run into several people that believe by attaching a title at the end of the name, protects them and splits their personal liability from their business liability. Steve made some excellent points and I truly hope that before moving forward, you will do your homework.
Web Reference: http://www.lindacefalu.com
0 votes Thank Flag Link Sun Feb 20, 2011
Consult with an attorney, he/she will best advise as it relates to your specific situation--accurate advice, prevents future problems...
0 votes Thank Flag Link Sun Feb 20, 2011
Sue made some great points for you Peter. You might want to chat with her about this before going forward.
She is from CA and could probably give you some good information.

One point I forgot to mention is that if you do decide to go for Sub Chapter S, it is EXTREMELY IMPORTANT THAT YOU NEVER, EVER, EVER co-mingle funds. In doing so, you would create a situation called piercing the corporate veil. Basically, if you find yourself in a law suit and the plaintiff can prove that you mix used those funds (such as writing a check from corporate for personal expenses and visa versa), you could lose the protection of the corporation.

You really need to do some research for your particular state and make sure that you are getting advice from a qualified attorney and/or accountant.

I am not an attorney and this information should not be construed as legal advice or opinion.
Web Reference: http://www.lindacefalu.com
0 votes Thank Flag Link Sun Feb 20, 2011
Peter,

I agree with Lynn. You need to meet with a good real estate or corporate attorney. Partnership, LLC or Sub Chapter S are probably all the entities you should consider. With the help of your attorney and your accountant, they will be able to best assess future ramifications of your decision.

Right now any type of investment property is risky business and very difficult to get financed. It is starting to lighten up a bit, but only a bit.
Web Reference: http://www.lindacefalu.com
0 votes Thank Flag Link Sat Feb 19, 2011
Confer with a real estate attorney VIRTUAL answer IS NOT to your best interest to many questions need be discussed and reviewed.

Lynn911 Dallas Realtor & Consultant, Loan Officer, Credit Repair Advisor
The Michael Group - Dallas Business Journal Top Ranked Realtors
972-699-9111
http://www.lynn911.com
0 votes Thank Flag Link Sat Feb 19, 2011
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