It is recommended that an LLC be set up as the owner of any park purchased. Do I set this up prior to getting a park under contract? AND is the contract enacted in the LLC’s name? OR can the park be transferred after purchase?
No need to set one up in advance. You can put the park under contract in your name or current entity and add “or assigns” on the contract.For instance as purchaser it could read on the contract:"Bruce Turner or assigns"I just closed on a park last week that I purchased with a current LLC I owned and assigned to a new LLC at closing.
LLC vs sole prop. I have been researching this issue trying to determine the best approach. LLC offers far more financial protection. However my CPA has informed me that there maybe some tax advantages to being a sole prop. Unfortunately this is not her area of expertise so I am doing my own research. DaleM you stated that it is recommended that an LLC be setup, where did you find this recommendation? Thx
An LLC is a ‘pass through’ entity for tax purposes, but separates you in the ownership area. It shields you in a lawsuit from liability. Nothing offers protection if your negligent. Here is how I structure my ownership.I buy the MHP in an LLC. Call it 'Park LLC"I also have an LLC that holds my ownership in the parks- ‘Park Ownership LLC’I also have a S Corp that manages the parks.So-‘Shade Acres MHP’ is owned by ‘Shade Acres MHP, LLC’My ownership in ‘Shade Acres MHP, LLC’ is represented by ‘Park Ownership LLC’‘Shade Acres MHP, LLC’ hires ‘S Corp’ to run the community’Park Ownership, LLC’ has ownership in many properties’S Corp’ manages many properties, and also provides things like health insurance. ‘S Corp’ is not a pass through for taxes, and you do NOT want to own ‘real property’ in this corp.
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Akm I attended the boot camp in Orlando last weekend. That is where I received that information.
I don’t think there could ever be enough tax advantages to justify buying rental real estate as a sole proprietorship (and as Jim noted, LLCs are pass through for tax purposes anyway so I’m curious what sort of “advantages” she’s talking about). Akm, as you can see by the other posts here - and I bet almost all other regulars would echo their comments - LLC is definitely the way to go. Also use new LLCs for each new park. There are additional layers of protection available, like I know Jefferson is a fan of land trusts, but LLC should be the bare minimum.
" Also use new LLCs for each new park. " kg2 gives good advice. It’s been a WHILE since I’ve posted but I figure y’all will let me back in the pool. kg2’s post seems like a good springboard into a related topic: Series LLCs. At the beginning of 2015, Alabama approved “Series LLCs”. In theory, a SLLC lets you segregate different assets from each other and thus avoiding the need to set up a separate LLC for each asset. Mutual fund companies use them to streamline their reporting with the SEC. Obviously, there haven’t been any cases through the Alabama courts yet but we were not the first state to approve SLLCs—I think Delaware was—so I’m guessing there is some law out there. Also, there is not a large body of Bankruptcy Court precedents related to SLLC. But, the IRS has ruled that the tax status of each series is to be determined individually. http://www.irs.gov/pub/irs-wd/0803004.pdf Here’s the Alabama statute if anyone needs help getting to sleep this evening.http://ali.state.al.us/documents/RevisedLLC.pdf I’m not saying that this is the end-all-be-all solution; I just wanted y’all to be aware of what’s out there. Seems to me, a Series LLC would be a good fit for using with the ownership of individual trailers, such as, Series A owns a trailer, Series B owns a different trailer, etc., etc., when the costs and admin of different a LLC for each trailer is overkill.Nice to be back.James (Ala.)
Another path is to not own the title in an LLC, but rather to own it in a land trust. The primary benefits are:1. Anonymity2. Circumvents probate3. Converts real property into personal property (e.g. easier to sell, and not subject the property to being reassessed for tax purposes)4. No annual incorporation fees to any StateEntity structuring is a weekend Bootcamp in and of itself. Dyches Boddiford and Pete Fortunato are my favorite mentors on this subject. Google around for them and their next Bootcamp near you.Best,-jl-
Wow, I am new to the forum and I must say that I am very impressed with the level of expertise and the quality of the comments being offered. I appreciate the valuable feedback.
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I think a key point to remember is what Jim said and that is all of this will not protect you if you are negligent. Hopefully you have liability insurance in case there is a problem.
It would be interesting to know actual cases where a claim was made beyond what insurance covered and if LLC protection was actually tested.
Brian Z said:
“It would be interesting to know actual cases
where a claim was made beyond what insurance covered and if LLC protection was
actually tested.”
Are you talking
about “piercing the corporate veil”? (Unlike most legal phrases,
“PTCV” sounds really cool when you say it.)
If the LLC member(s)
will take a few steps and follow basic business practices, there should be no
reason for a court to allow another to go beyond the LLC. I would wager
that most times that a PTCV strategy is employed it is because there is NO insurance
coverage or, at least, not enough. The last PTCV case I read from Alabama
was a MedMal against a nursing home company that had no assets and only $25,000
in insurance. BUT, the owner had several “other” companies that
dipped their hands in the nursing home’s pie—all the benefits, none of the
worries—is a good way to get pierced.
Unless there are
multiple deaths and/or extremely egregious circumstances, most personal injury
lawyers I know would take policy limits of a million or two and move on.
There is a definite time/value calculation done when an offer is made to
settle a matter. And, usually two million will tip the analysis towards
SETTLE NOW.
BUT, in my mind, the
larger benefit of the insurance policy is the DUTY of the insurer to PAY FOR
YOUR DEFENSE. This can be huge. AND, most attorneys I know that do
insurance defense are intellectually top-notch, that is, you get a “goodun”.
—
James (Ala.)
If you are negligent then the LLC is liable, and you as an individual are as well. There is no ‘insurance’ for negligence. A good example of this might be a CEO of a company that directs the company to do something that constitutes an illegal act. It might involve finances, like hiding money. Or misreporting earnings. It could be hiding some sort of error that costs people lives of tanks the stock. If you do something so outside the box willingly, then ‘compensation’ goes outside the corporation and also falls on the people that directed the actions. So by definition- Five elements are required to establish a prima facie case of negligence: the existence of a legal duty to exercise reasonable care; a failure to exercise reasonable care; cause in fact of physical harm by the negligent conduct; physical harm in the form of actual damages; and proximate cause, a showing that the harm is within the scope of liability.guilty can result in monitory damages and jail time.
I have heard that as well from several attorneys, that most will take 1 or 2 million insurance policy.
But the point is not to neglect your properties and do not be a slum lord.
Google Sam Zell and see the 111 million a jury awarded for his neglect.
Jim, I think you are confused between intentional acts and negligence. Fraud will pierce the corporate veil, but negligence most certainly should not. That is exactly what insurance is for. If it was an accident, you are not liable. If it was not an accident, it was someone’s fault. If it was your fault, it could be from your negligence (“neglect”) or could be intentional. In either case that means you are liable and your insurance company should protect you, and if not then your company formalities should protect you, and if not still, then it is almost certainly because you personally did something “bad” i.e. fraud or another intentional wrongdoing (“intentional tort”). Treating your company as a “free-for-all” cash bucket is a form of wrongdoing that tends to tear the corporate veil. But not negligence. How could you otherwise ever hire an employee?edit/update – That last paragraph wasn’t for Jim, just a general “you”
Dale,I’m learning about LLC’s as well, I don’t think you would be able to transfer it title after the sale unless it is approved through your lender, you would need to set up the LLC before closing but not before getting it under contract. The one we set up, in Alabama, didn’t take long and that’s probably according to the state you are dealing with. We did ours ourselves, it was a very simple form to fill out and pay the money, the confusing part was the Articles of Incorporation, I had no idea how to do that and did hire an attorney for those.The other thing I learned about LLC’s while doing our taxes is that the IRS does now recognize an LLC as an entity, you have to elect your filing status, C Corp, S Corp, or partnership, etc. MY UNDERSTANDING IS (and I read this off the irs.gov page) that a C Corp is double taxed, an S Corp election is not and I don’t remember about a partnership.Good Luck!Leighnae
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Partnership is pass-through, and an LLC with multiple members will be taxed as a partnership unless a “check-the-box” election is made to treat the LLC as a corporation.A corporation can elect to be an “S-corp” which also has “pass-though” taxation. Otherwise a C-corp is taxed itself (and then the dividends are taxed as income to the owners when distributed).Brandon@Sandell
I concur with Brandon on the tax info and liability protection of LLC’s. Good advice.And I’ll further add that LLC’s won’t protect your equity within the LLC from liability losses, but it will generally (almost always) protect assets you own outside of the LLC. For example, If I own ABC MHP in my LLC called ABC MHP, LLC and someone falls on a sidewalk crack, damages their spinal cord and gets a judgment against ABC MHP, LLC for $25 million, and I have only $2 million of liability insurance, the plaintiff/creditor could only go after my assets owned by ABC MHP, LLC. They couldn’t go after my other assets such as my stocks, cash, other real estate holdings held outside of ABC MHP, LLC. Thus, the worst case would be a loss of all of ABC MHP. However, if I owned this same park in my personal name, not an LLC, the creditor could go after all my assets that aren’t specifically protected by state law (usually a home, Pre-tax retirement accounts, etc).To set up an LLC, you need to do the following steps:1) Go to your state’s Secretary of State website and look for the business forms section (most state LLC’s are fine and choosing one in your state usually is a reasonable idea, though if you have multiple investors you should ask your CPA about using a Nevada state LLC or one in another particularly favorable LLC state);2) Complete the usually simple form and mail in with your LLC fee (usually $250 to $500). Make sure the name you pick is available by picking a unique name or verifying the name is available on the Secretary of State website name search - some states allow this real time; and3) Go to the IRS website and apply for a federal tax identification number - you’ll need this to open bank accounts and for some other transactions from time to time (do this after you confirm your LLC was confirmed and the name is available / permissable).As a general rule if you are a sole investor/owner or husband/wife, you don’t need to spend the extra money to hire an attorney to create the LLC Operating Agreement. This document sets forth the detailed rules of the internal operations of the company. However, if you have other investors involved in your park, then I’d certainly recommend, and most investors will demand, you have an Operating Agreement professionally drafted by an attorney ($1,500 to $3,000).KurtKurt@mobileagency.com
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I know this thread is kind of stale but it seems like it’s still an important topic.
I wanted to add that Alabama has now begun allowing Series LLCs (which seem perfectly suited for the real estate investor.) I haven’t had any experience with them yet. I believe Missouri has allowed Series LLCs for a while and was wondering if anyone on here has set one up. AND, has anyone had be sued yet?
Kindly,
James (Ala.)
Jefferson, you often come out of left field with an interesting idea that few would have thought of. I always appreciate your comments.
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Very interesting…especially about C Corp being double taxed. I have to ask my accountant about this and see how he has us classified. Thank you for typing this in your comments.