Hey Bigger Pockets, it's Matt. Today we're going to talk about a question I see all the
time on the forums, and it's even beyond just LLCs and what are they and everything like
that. It's should I form an LLC for every deal? A lot of people have been asking the
question, "Should I form an LLC at all?" Well, yes, the first answer to that question, and,
"What is an LLD?" A lot of the basic stuff. That's all out there on the forums and other
articles on that.
We're going to talk about forming an LLC for every deal you do, and why you should and
why you shouldn't. Okay, and I have my opinion on this, and I'm sure you'll see my opinion
come out, but there are schools of thought on both of them. Let's review both schools
of thought, and then we'll get into what I think about it, okay?
The reasons why you absolutely should is if you've got different owners. That sounds like
a simple thing, but let's say you buy Property A with you and your brother-in-law, and you
buy Property B with just yourself or you and your wife or you raise an investor that comes
in and throws some private capital in your deal. All those three scenarios are all different
setups and different ownership, so you should definitely have an LLC for each of those deals
that has a different ownership breakdown, different percentages, different owner benefits,
different owner rights and responsibilities, roles, goals, and compensation, and all that
for each owner, for each LLC. The operating agreement for the LLC will define all of those
things was. So it's yes, absolutely, if you have different owners.
Now, you don't think about this, but this is a good one. If you are doing business in
multiple states in the union in the country of the United States, you should definitely
have an LLC for each state, because if you don't, you will have to file the LLC that
you're in as a foreign business entity in the state that you're working in, and in some
states you'll have to have a mailing address in that state somewhere. It becomes a pain
in the neck, so it makes sense. Also, you have to pay income tax in the state you're
registered in and you'll have to pay state income tax in the state you're doing business
in, so it can cause double taxation for your LLC. It becomes simpler if you do if you form
an LLC that's in the state that you're doing business in, that's number two.
Now, I do this sometimes, sometimes I don't. It actually depends more on the owners that
I'm partnered with, but fixing flips. Now, why would you want to form an LLC for each
fix and flip you do, Matt? I'll answer that question for you folks asking that. I don't
do it. First of all, the reason I don't do it on every flip is if it's just my company,
just the DeRosa Group that's doing the flip, the DeRosa Group is an S corporation and DeRosa
Group has W2 salaries that it pays and it also has business income. I have a video out
there that you guys want to watch on why S corporations are awesome where I interview
my CPA. It's on Bigger Pockets, and he and I talk about this. I'll put it in the show
notes in the link. You guys can link to that conversation. That's why you want to do flips
not in an LLC, but using an S corp, because there's great tax benefits for doing flips
in an S corporation.
If you don't have an S corp, and if you don't have W2 salaries that you're paying yourself
and then business income on top of that, then you want to form an LLC for every deal. Here's
why I asked that question earlier, and let me answer that question, okay? If you sell
123 Main Street to a home buyer, and that home buyer's happy, they go on down the road,
and then you start flipping another property, the first home buyer could have a liability
claim. They could have issues come up with themselves or something like that, and if
they go to ... It closes down the entity that did that flip and that flip is now behind
you and it's done. Then you do a new flip, it's designated for that property and it compartmentalizes
the project and doesn't link one project through an LLC to another if you were to have a liability
claim. Odds are, if you have a liability claim, you will have canceled your insurance, which
is another thing we're going to talk about big time. You will have canceled your liability
insurance on the property you sold a while ago by the time that property was sold.
So from a protection, to close the door and to close the project down, it makes sense
to have an LLC for every address. It's a bit of a level of protection that you can have
in there. I do it sometimes. I don't do it all the time. Most of the time when I do it,
it's because of this. It's because I have a partner in the flip. But it's something
that some people do to compartmentalize the flips so that whatever happens on this flip
can't affect other projects that I may have going on or have done in the past. Okay? S'alright?
S'alright?
Okay. Now, here's a big reason why people do LLCs on every deal, and we're going to
discuss this one in great detail, but that's for asset protection. The school of thought
on that is if I own 456 Main Street, and that's my rental, because 123 Main Street was my
flip. Remember that? So 456 is my rental down the road, and I also own a property over here
and a couple other properties, and if somebody were to sue me on a liability claim for a
slip and fall on 456 Main Street, that person could not come through and affect my ownership
on the other properties and take my entire portfolio. Because the properties are all
under one umbrella, so they can't go sue that LLC and go and pull all that LLC's assets
and everything like that. That's the school of thought is asset protection. It compartmentalizes
your assets. So 456 Main Street and 123 High Street and 123 Second Street are all in separate
companies. That is the school thought. We will debate that in just a moment, my friend.
Now, here's the reasons why you should not get an LLC for every deal. Number one, biggest
one, is it's not required by law. You don't have to. Any attorney or whatever that would
tell you that you have to do it by law is wrong. There's no law around having to form
an LLC for every deal you do. This is maybe why I don't do it is for cost. If you form
an LLC for every deal, there is a filing fee for that LLC, at least in setting it up. There
is a CPA fee for filing that LLC's tax returns. Now, I've seen people debate, "Well, what
about single member LLCs," and stuff like that. I think it's very easy to see through
a single member LLC because it doesn't even have a tax return. That can be debated, too,
if you like, but typically it's not a single member LLC and if it has some several members,
the cost associated with maintaining that LLC, from paying your CPA to paying filing
fees to the state that you're in, can start to add up, especially if you're buying a bunch
of little small single family homes or small multis or something like that, this will become
a factor.
Another reason why you want to not get an LLC for every deal, meaning you want to ... portfolio
of properties, you want to buy a bunch of properties under one umbrella. Big reason
why you want to do that, which in turn means that you don't want to do an LLC for every
deal, so that answer is no for that, but why you wouldn't want to put them all under one
umbrella, or a larger umbrella, is because it makes it easier to get loans, believe it
or not. Everybody talks about portfolio lenders and stuff like that. If you're buying $50,000-$60,000
houses and renting them out, it will be harder to get a lender that wants a $50,000-$60,000
loan, right? Myself and a lot of people that are in my part of the world do the BRRRR strategy,
the buy, rehab, rent out, refinance, repeat method, but they'll do it on a small portfolio
of properties. They'll do three, four, five, six, seven addresses at a time.
You couldn't do that if you were doing an LLC for each one of those deals. If you portfolio
the properties under one LLC as this no would say that you're doing, then you've now created
a loan amount that banks will talk to you about. Banks don't want to lend $50,000-$60,000.
They'd rather lend you $300,000, $400,000, $500,000, $600,000, so why not create a loan
of that size? It's more appealing to them. It's the same amount of work, but it's more
fees. They get to make more money and they get to meet their costs and their goals much
easier if they give you a big loan versus this little small loan that it would be if
you did it on this side. So consider that.
Now, here's the big conversation, okay? This is the asterisk Matt Faircloth's strong opinion
about these things, but it's also been my experience. The reason why is because this
is not true, okay? That insurance will protect you just as well as an LLC will, okay? It's
not that it's not true you don't get asset protection at all, but you don't get any more
asset protection, I don't think, in having multiple LLCs for every deal that you do,
for every single family home that you own, or for every rental property that you have.
There is no further asset protection you get in having each deal in one LLC then having
a portfolio of properties under one LLC.
Here's why, okay? If an attorney sues your LLC because their client had a slip and fall
... Listen, I've been in business for 11 years. I've had three slip and falls. I've had a
tenant claimed a piece of sheet rock fell off her ceiling and hit her in the head. We
had a guy that claimed he slipped and fell on carpet in his apartment, and he broke his
back, by the way. He broke his back falling on carpet in his apartment. I may have some
other liability stuff out there, too. So we've, unfortunately, had liability claims many,
many times. Not one time and not one time did anybody else that I know, did the attorney
suing try to pierce the corporate veil, okay? Meaning to try and reach into the LLC and
get ahold of the assets to try and foreclose on the assets, or even further this, this
gets really scary, to pierce the corporate veil and come after me personally to try and
get my home or my personal cash or my car or whatever, which is what some people worry
about, and that's why this whole LLC thing is there. "I don't want them to come get my
stuff, to come get my house, or to have to file bankruptcy because the tenant slipped
and fell at my property." None of that is going to happen, and here's why.
My attorney friends out there, I love you, but attorneys are lazy and attorneys, maybe
they do what they have to do, and they're going to go after this. They're going to go
after insurance. They're going to go after general liability insurance. Just every claim
that I've had ... I even had one attorney just submit a letter that said, "Hey, my client's
going to sue. Please submit this letter to your insurance company so that we can work
out an arrangement." That's it. They didn't even want to sue me really. They just sent
a letter saying that, "Hey, we're, we're going to sue you, and send this letter to your insurance
company." Can you believe that? I actually called the lawyer on that one. I said, "Hey,
if you're going to send this letter, you might as well just .. I'm not going to send it to
my insurance company. You need to go ahead and sue me. And they didn't, by the way. They
let it go. He said it was a bogus claim.
Attorneys that have real conversations and people that have real slip and falls and stuff
like that, that's what insurance is there for. There's large insurance policies that
you have on your properties, and by the way, the larger these portfolios get, the larger
insurance policies you should get to cover potential general liability claims. You start
out, maybe you have $1 million coverage with $2 million aggregate, meaning that 2 million
is the most that they'll cover for multiple occurrences. But if you have multiple properties,
you can up it to $2 million or $4 million or go up from there, talk to your insurance
agent about what's available for multiple properties. There's even things called umbrella
insurance coverage you can get. You can get a lot of insurance, and it's going to be cheaper
than running around with a bunch of LLCs.
Insurance, my friends, is the reason why, and it's just the way the world works, fortunately
or unfortunately, that insurance will step in and take care of you way before an attorney
or a lawsuit is going to get through all of this LLC stuff and to go and try and take
the equity in another property or put a lien. By the way, it will take them years to do
one of those foreclosure filings and to come and put a lien and foreclosing the property
and to come and get your stuff and everything like that. It would take them years to do
that, where an insurance claim could take anywhere from six to nine months. Maybe they're
lazy, maybe they're not. Maybe they just know where the money is, right?
Anyway, that's why I say I recommend no for an LLC for every deal. There's other folks
out there, love to get into a conversation with you about it, other schools of thought
I know. I'm a little wild, wild west sometimes in my business, but I'd be happy to go into
conversation with some of you folks who are a little more conservative and think this
is a good thing to do. Let's talk about that. As always, if you want to leave some comments
down below, I'd love to hear your thoughts, yay or nay, on this. As always, always guys,
I sure appreciate you guys watching and getting into conversation with us, and have a great
profitable week.