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To Incorporate or Not to Incorporate
10:46 PM 02/20/2013
We have the opportunity to buy a small investment property in BK with the plan to rent it out and hold on to for 10+ years. We are debating whether or not to buy it as an LLC or under our own names. We are buying with cash, so bank financing is not an issue. The reason would be to protect our other assets (mainly our 2 family home that we own). I have read conflicting advice, the main argument against is:
-It doesn't actually protect you - if someone sues you with a good lawyer, they can easily 'pierce the corporate veil' and still come after your personal assets, especially if you don't keep your books and tax preparation in perfect order, which is cumbersome, and pricey. I've read that the best thing is just to get very good insurance including an umbrella policy.
So I would love to hear from anyone with personal experience with this. How cumbersome is the LLC? Did anyone decide one way and regret it? Personal anecdotes would be very helpful - I've spoken to enough lawyers and accountants and found too many conflicting opinions!
One last thing - my lawyer has quoted me $1500 for his fees and said it would be around another $2000 to put an ad in 2 papers (a requirement in NY State). If that is the only expense and it will give us peace of mind, we would just suck it up and do it. I'm just concerned with committing to ongoing headaches and expenses with more complicated bookkeeping and tax prep - if it doesn't even protect us.
THANKS IN ADVANCE!
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South Slope, NY
I'm not an expert but i pretend to be one.
If this is for personal liability shield you're seeking (accident etc) you would be best served with a more comprehensive insurance policy that covers the property in question - plus umbrella coverage for that property as well as your other properties. As you mentioned, piercing the LLC is easy, in addition to fees you actually have to run it like a seperate business. No checks written to cover any personal expenses, hold a board meeting, huge huge ongoing hassle.1:42 AM 02/21/2013 | 0 Votes
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You should maybe consult another attorney or tax professional for expert advice if you don't have enough information from your current one to make a decision.
Though really, it seems to me that deciding to spend the money to set up the LLC is wholly a personal decision, based on your views of potential risk and on your oprivacy, and not something where one person's decision will be at all applicable to your decision.
That said, it would be silly to set up an LLC if you aren't going to keep the books and records completely separate in a business-like manner.8:57 AM 02/21/2013 | 0 Votes
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From what I understand, it doesn't make sense to buy an owner-occupied multi-family house as an LLC. Probably because you would still be liable for the investment of the home under the LLC, which is presumably your biggest asset that you're trying to protect. And maybe because you won't get the primary residence tax benefits if it's your business and not your home (that's just a guess). Our concern now is that with an additional investment property - if something terrible happened with our new tenants, they could potentially sue us for our personal assets, meaning our home. An LLC would mean they could only sue us for the value of the condo. But not if this 'piercing the corporate veil' issue is true. So basically, the added FUD is putting our home at risk if we get into hot water with our investment property. I don't like to make decisions based on fear and panic...but of course, my attorney feels it's his job to spell out all the worst-case scenarios. And as much as insurance as we can get - you never know how much they will cover until you need them the most - and that's where you hear real horror stories.
1:24 PM 02/21/2013
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Brooklyn, NY
Just as an FYI, incorporating in NYC will cost far less than 3500.00. There are other companies that will do this, including the publication requirement. Cost me about 750, IIRC. As for the rest, I was looking into the same thing you are, when i got my second property. At the time, it seemed that incorporating a house served you well if there were to be multiple owners, or partners. beyond that, no significant privacy benefit (and because of the nature of house expenses and rental incomes, no significant tax benefit either) - i opted not to (my LLC is a business, but the homes are personal assets) - and regarding the insurance, that's kind of a given either way. whether you get one umbrella policy for both homes, or two individual policies, they should both be pretty darn good
3:22 PM 02/21/2013 | 0 Votes
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Brooklyn, NY
Just as an FYI, incorporating in NYC will cost far less than 3500.00. There are other companies that will do this, including the publication requirement. Cost me about 750, IIRC. As for the rest, I was looking into the same thing you are, when i got my second property. At the time, it seemed that incorporating a house served you well if there were to be multiple owners, or partners. beyond that, no significant privacy benefit (and because of the nature of house expenses and rental incomes, no significant tax benefit either) - i opted not to (my LLC is a business, but the homes are personal assets) - and regarding the insurance, that's kind of a given either way. whether you get one umbrella policy for both homes, or two individual policies, they should both be pretty darn good
3:22 PM 02/21/2013 | 0 Votes
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Flatbush, NY
I had an attorney (who also did the contract & closing) set up an LLC to purchase an apartment building and the cost was about $2200 total for LLC filing, kit & publishing. You could probably set up an LLC on the cheap using legalzoom (but you'd still have to pay the required newspaper publishing fee in addition).
LLC seems to be a very common way to own multifamily investment properties. If it doesn't really protect your personal assets that would be news to me. Keeping your books and tax preparation shouldn't be overly cumbersome. Keep good records and pay an accountant to prepare your LLC returns (a business expense which offsets profit from rental income) and get K-1s for all LLC member/partners with all the info you need to include in your personal return.
If it's a single apartment you're purchasing as an investment rather than a multifamily with more tenants and more risk of a big lawsuit, it would also be reasonble to buy as individuals and have plenty of insurance.6:11 PM 02/21/2013 | 0 Votes
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South Slope, NY
"you never know how much they will cover until you need them the most - and that's where you hear real horror stories."
get familiarized with excess insurance - the most popular of which is an umbrella policy. It sits over your other insurnace and kicks in when that runs out or does not cover. umbrella policies have broader coverage with higher liability limits to protect your home, your car, and anything else that someone may go after in trying to collect. It basically covers everything you need, that is the point of it. You can look at high limit options - say up to $10 million - and it shouldn't be that expensive. ($1000/yr?)
regardless of whether you have the LLC or not (they are somewhat easy to pierce in many of these situations), you need an umbrella, and at the end of the day is what gives you comfort that you are not exposed.
btw - - even if you don't buy the building, you should have a couple million of umbrella!!
http://www.nytimes.com/2008/03...11:03 PM 02/21/2013 | 0 Votes
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