Forming a limited liability company is a way to shield your personal assets from claims against your business or claims against one element of your business from another. A series LLC is a unique entity structure that allows you to create a “parent” entity and numerous “child” entities to separate your various investments without having to form each entity separately. As a result, the costs and paperwork is lower than if you created the same entity structure with multiple LLCs.
Frequently Asked Questions
No. The process of forming an LLC is straightforward and can be done on the Secretary of State’s website. That being said, the value of an attorney when you are forming an entity does not come from filing the forms, but rather the other services provided. First, it is important that you select the right entity (or entities) for your business model. Although an LLC is right for most people, its not right for everyone. You might be better suited with a Series LLC or in some instances a corporation. You might also simply need more than one entity to ensure you are protected. Meeting with an attorney helps to make sure you consider the right entity for your business. We offer entity planning sessions to our clients, which involves a multi-step process where we evaluate your individual goals, assets, and business model to determine the right structure collectively. If this is the first entity we have formed on your behalf, or if your business or asset structure has changed, we would recommend adding on this service to your order.
The next value provided by the attorney is drafting an operating agreement. If there is only one owner of the business, this is not that important, and you can just use a form, such as this one on our website. If there are multiple owners; however, it is important to draft a detailed operating agreement as it sets forth what each owner can do, what approvals are required, etc. The drafting of this operating agreement is included in our entity formation services.
Finally, forming the LLC is only half the battle. The other half is making sure that you understand what you need to do to not invalidate the protections of an LLC. If you utilize our firm for entity formation, we will go over these steps with you during a phone call or video conference so that you can have confidence that you are doing what you need to do to protect your assets.
There is a lot of misinformation in the real estate investor community about the entities that you should use. Many companies promote the alleged value of Nevada or Wyoming LLCs because of asset protection or anonymity. What they don’t tell you is that Kansas has the same charging lien protections as Wyoming and there is no such thing as true anonymity when it comes to entity formation. If someone really wants to sue you, they will figure out who the owners are — trust me because as a lawyer I do it.
More important than this, however, is that anyone who tries to sell you on a one-sized fits all entity structure is not looking out for your interests. For example, I am aware of an attorney down in Texas who promotes a structure with series LLCs and Land Trusts. I am not saying this isn’t a good structure — and in fact at times I would recommend it — with that being said, that elaborate of an entity structure may not be necessary for a retired couple living on social security and income from their rentals or an eighteen year old with no assets who is working on purchasing his first property.
The bottom line is that your entity structure needs to be right for you, and that is why we developed a detailed process that helps to evaluate your risk tolerance, organizational skills, investment strategy and future plans, and assets you risk losing. Once we have reviewed that information, we will present a plan to you that we think is best, but that plan will include options and ultimately you will decide what plan is best for you after learning the pros and cons of each option. Moreover, if your business model includes partners or other investors who you work with on projects, we will have detailed conversations about how to structure the business to ensure accountability of all involved and to address situations such as how to proceed on an issue when there is a tie, or when one of the members dies.
It depends. If you own one property or have limited equity in your properties, one entity might be enough. One the other hand, if you have a lot of equity in multiple properties, you may want to form multiple LLCs (or a series LLC). The ultimate decision is a balancing act between risk and paperwork and the right decision for you takes into account your personality traits, business model, and other factors. If you add on an entity formation strategy session to this order, we will send you a detailed form to help you to think about your structure and for us to provide you with customized advise for you specifically and not a generic answer given to all investors.