I'll be honest with you – I'm a busy guy.
In fact, two weeks ago I was forced to record a video because there simply wasn't time to write an article. And last week I skipped all together. Brandon begged and begged (as in nobody is going to read the blog if you don't write...please, please Ben). Alas, I was busy!
This week – still busy as all get up. I may write about what's keeping me busy later on. But, seeing as I just can't risk giving Brandon a heart attack by skipping yet another week, today I've decided to write an article of no more than 800 words. This will likely be one of the shortest contributions I've ever written for BP, and I'll go over if content quality demands it. But, time is money and I don't have enough since I don't have a job. Besides, the mental exercise of packaging solid information into 800 words sorta appeals to me.
It's 5 AM. I give myself 30 minutes to put 800 words on the page. Here we go:
Should I Use An LLC?
This question comes up in the forums with some regularity. I think I can answer this question within 800 words, inside of 30 minutes.
Question: Why do we use LLCs?
Answer: LLC is what we call a flow-through entity relative to taxation. This means that income is not taxed at the LLC level; all of the income flows through and is taxed on the member's personal income statement. Thus, an LLC has no impact on our taxes whatsoever.
With this in mind, the only benefit of an LLC is relative to Asset Protection, which is why this vehicle was created. In other words, people figure that by taking possession of property inside of an LLC, they can limit the liability exposure to the asset base inside that LLC, and free them personally from any liability.
First of all, it's appropriate to remember that if criminality and/or negligence on your part is proven in court, no LLC will save you. An attorney will crack that baby faster than I can slap Brandon Turner! :)
Secondly – I want to ask you a question: How Much Wealth Do You Own? I mean seriously, what the hell are you so worried about exposing and/or losing? If this is your first, second, or third house (all of which you've bought for $30,000), then how much Net Worth do you really have at risk that can be attacked?
I am not an attorney, so take everything I say in this piece with a grain of salt. But, from knowing lots of attorneys (I know lots of attorneys-or should I say they know me) I can tell you with some level of confidence that most do not particularly take pleasure in working for free.
To make the determination relative to their advice to their client about whether to pursue a law suit against you or not, the first thing they'll do is check to see what you've got that could be taken from you. With this in mind, not having wealth is the best deterrent to law-suites that there is...is it not?
Yep – that works better than an LLC.
Say you buy a 4-plx for $120,000. If you put down 20%, which would mean that you're stupid and don't know how to play this game the right way, your equity position would be $24,000. If you were ordered to liquidate to cover damages, how much would they get after RE commissions, property taxes, escrow... $10,000 tops? And this would have to be split between the client and attorney? Is this worth their time to sue?
Now – if you're like me, in other words not stupid, and instead of making a 20% down-payment and buying this building for $120,000, you paid $90,000 and financed every last cent, then 3 things will have been true:
- Very likely, nobody would think to challenge the value as anything higher than $90,000...
- If so, they would note that there is no available equity to be had since the building is financed up the wazoo...
- Even if you were ordered to liquidate, how much would you loose – all you've put in-$0? Good luck on that math...hahaha
I am not saying do not have LLCs.
I do, and so should you. But, in the beginning, while you can still qualify for Fannie/Freddie conforming Notes, for a lot of you it might make sense to at least consider buying in your name. Fannie/Freddie will not let you buy inside an LLC, and smaller properties cash flow much better at the 30-year amortization and lower interest rate which is part and parcel with conforming Notes.
I know what you're thinking – I'll just buy in my name, and then move it to my LLC. OK, whipper-snapper; just remember that in doing so you will be triggering the Due on Sale Clause in any modern conforming loan, which in turn triggers the Acceleration Clause.
Make sure you get it in writing from the bank if this is your plan. Some banks will let you move assets into a Single-member LLC – others will not. I highly advise that you do not do it behind their backs, though...but it's your call, since you obviously know much more about this business than I do!
I'm done. I encourage you to comment; this is an important subject to talk about. And in case you've been counting – about 850 words...
BAM! Am I good, or what? And I did this from 5 to 5:36 AM on Thursday morning (a few more minutes to load it into the WP and review). Now that's commitment. I think it's time for a freaking raise, man!
This article originally appeared on BiggerPockets.com and is Copyright 2014 BiggerPockets.
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