Should I Form an LLC to Hold My Investment Properties?
Lets say for example you hold three properties in your own name and one of your tenants files a lawsuit against you. If your insurance
doesn't cover the damages, the property and any other properties and personal assets that you own are in danger of being taken by the courts.
You can however form a company to hold you property. This company is treated as a separate entity and so if liable for damages, only the
company's assets can be taken. You have several choices for types of corporation, depending on your preference for tax treatment and structure.
The most common company type to use is a Limited Liability Company (LLC). This is a very simple type of company to form. It has the advantage
of protecting any assets held under it and is known as a pass-through entity for taxes. Basically being pass-through means the profits or
losses are counted together with your personal income and expenses, making tax returns much simpler.
Forming an LLC
A Limited Liability Company can be formed by a single person (or several people), who doesn't have to be a US citizen. The only requirement
is the company must have a Registered Agent address. This address is for formal communication from the Department of State and must be a
US address. Companies such as InCorp provide a Registered Agent service as part of their incorporation costs, which are very reasonable and
includes mail forwarding to any worldwide address.
EIN Number
To open a bank account in the name of the LLC you will have to apply to the IRS for an Employee Identification Number (EIN) for the company (shown below). An
EIN number is basically a tax ID number for your LLC. If you have a personal tax ID number (SSN/ITIN) then you can click on the link below to get your EIN:
Apply for an EIN Number On-Line from the IRS
Alternatively I offer an EIN registration service for $100 to get your newly formed LLC an EIN number.
Each state has its own rules regarding formation of an LLC and you should check what formalities need to be done. For example, when I formed
my LLC in New York, I had publish a notice in two newspapers (daily and weekly), for 6 weeks, in the county of formation, within 120 days
of formation. If this wasn't done properly and verified, then the LLC could have been suspended. I used a company that specialised in this
procedure. Apart from this the actual formation in New York is very easy and can be done on-line for around $250.
Your LLC doesn't have to be based in the same state as where you are buying properties and some states are better than others, as they favour
landlords and treat lawsuits better. You may however need to complete a Doing Business As (DBA) registration in the state you are buying
the properties, to register with the utility companies.
One of the most important things in running an LLC, is keeping good paper records and keeping business and personal transactions separate. If
you are unlucky enough to get sued for damages, the courts can rule that you are not running your company properly, separate from your
personal business, and 'pierce the corporate veil'. In which case all your assets, whether under the company or not could be in danger.
The most important piece of paperwork is the Operating Agreement. This structures how the company is run, the members of the company and
the percentage share each member holds of the LLC. These can be downloaded from a number of web sites and then modified to suit.
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Please Note - The information contained in this section is only my opinion and should not be regarded as legal or tax advice