Jason Marino is an attorney at law at Royal Legal Solutions in Austin Texas, a firm that specializes in helping real estate investors protect their assets and create time and financial freedom. Jason is also a popular thought leader on the real estate forum Bigger Pockets. We asked Jason to share some insight regarding LLC’s for real estate investors and how to best utilize them.

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What real estate investors should really consider setting up an LLC?

Jason: I think that the response to this question is context specific. In my opinion, it comes down to the investor’s particular situation as well as their level of risk aversion. I can provide a few examples of different assets that investors commonly own.

Certain assets, like retirement accounts, have internal protections that are offered by the federal government and, to a varying level, by State governments. Similarly, primary residences may have a homestead exemption from creditors in different States. As a result of this protection, these assets may not need the additional protection that an LLC can provide.

Other assets, for example, brokerage accounts, bank accounts, and precious metals do not normally have any internal protection. Despite this, these assets do not usually generate external liability. This means that they do not create liability the way that other property does. An example of this is real property or machinery. Based on this, it is believed that these assets can be lower risk than other assets. While this may be true, these assets, as a result of being connected to an individual owner, can be taken as the result of an internal liability. An example of this would be that the owner is found personally responsible in a car accident. That said, there is a good argument for a risk averse person to consider an LLC in these situations.

The other asset class that should be mentioned are assets with no internal protections and generate internal liability and external liability. These assets would include real property, vehicles, and equipment. These assets can generate liability on their own, without any influence of the owner. Additionally, these assets can be taken if the owner is involved in a lawsuit that names the owner personally, for reasons unrelated to the assets. These assets likely present the greatest risk of those described in this reply. As a result, a risk averse person should consider an LLC for the ownership of these assets.

How do you actually set up an LLC?

Jason: The process starts in a very similar way in almost all States. You would file the LLC with the Secretary of State. There are services that are available to assist you with this, or you can go directly to the Secretary of State’s web page and complete this process. This would involve choosing an LLC name, the purpose of the LLC, providing a registered agent, and entering the information related to the Managers and the Members. Once this information is provided and a fee paid, the Secretary of State will send you a Certificate of Formation or similarly named documentation as confirmation that the LLC has been filed.

The LLC normally will require a bank account, and this can only be done if the LLC has an EIN. This process can be completed through the IRS webpage. The LLC will additionally need an Operating Agreement. This document is necessary in order to provide details as to how the LLC is controlled and owned. In situations in which there are more than a single Manager or Member, this document will help avoid confusion and control internal disputes. It is important to remember that many States require annual compliance in order to maintain the LLC in good standing. This should be completed on a regular basis in order to avoid the LLC involuntarily being shut down.

What are the major advantages and disadvantages of an LLC?

Jason: The main advantages that I see with an LLC are asset protection and anonymity when created and maintained the right way. These entities have the ability to separate your assets into different compartments in order to minimize the damage done in a lawsuit. Additionally, when structured in a careful way, they provide privacy that cannot be obtained when owning assets in your personal name.

The main disadvantages that I see with an LLC are creation costs and maintenance costs. These entities need to be created and then comply with the law in order to be valid. Without conforming to these rules, they are subject to be disregarded when challenged. Additionally, if the LLC elects to have certain tax treatment, it can complicate your tax filing.

Traditional LLC vs Series LLC: what is the main difference between the two?

Jason: A Traditional LLC is a single entity. Whatever is placed into it is in a single compartment. If you have several assets and want to put them in separate entities, you need to create more than a single LLC. This requires maintenance for each entity and a registered agent for each entity. A Series LLC is an entity that can be created in many States, but it is not currently available in all States. It offers the ability to have a single LLC that can replicate itself into multiple individual entities. Each of the replicants or cells is its own LLC for limited liability purposes, but is under the Parent LLC for maintenance purposes.

Which is better for investors, a traditional LLC or a series LLC?

I am not sure that there is a better option or a worse option. The Traditional LLC has an application for some investors, and the Series LLC will work better for other investors. The decision will likely come down to the volume of assets and what maintenance cost the investor is willing to accept.

The future of LLC’s: any changes on the horizon that investors need to be aware of?

Jason: LLCs have existed for a long time. Based on my experience, the evolution of these entities has not been a rapid process. The important thing would be to do research on the laws in the State where your LLC has been formed or will be formed, and look at resources at times to make sure that you are aware of any updates that may have taken place.