A few blog posts ago, I explained, in shorthand, a formula I use for setting up LLCs in real estate investing. Itās not a universal formula, but itās a very robust structure that can help most real estate investors create anonymity for their holdings. I promised I would provide more detail in a future article. So here goes. Iām going to show you exactly how to set up LLCs for real estate investing. By knowing this one formula, you will be miles ahead of other investors.
The idea, as I said before, is to create a āsmokescreenā that prevents your ownership of properties from being discovered in a search. To do this, you will put your properties into limited liability companies. You will also shield the fact that you are the owner of these LLCs.
The first step is to set up a āholdingā LLC. If you know how to set up any LLC (itās pretty simple), then you know how to set up LLCs for real estate. Theyāre no different from other LLCs, but you need to take a few precautions.
1. You want to keep your name off the holding LLC.
So, if your name is Fergus Ferguson, then obviously you donāt call your company Fergus Ferguson, LLC. Kind of defeats the purpose, right? But it goes deeper than this. When an LLC is formed, many states collect information on who the manager(s) or member(s) of the LLC are. Your information then becomes searchable by anyone with a smartphone. To avoid this, I recommend establishing an LLC in Wyoming (or Delaware for commercial real estate). Not only does Wyoming keep the manager/membersā names anonymous, but it also offers asset protection and charging order protectionāmeaning if you are sued personally, they canāt come after the holdings in your LLC.
2. Next, youāll register a second LLC in the state where the real estate property is located.
The property itself will be deeded directly into this state-based LLC. A lot of people think they can skip this step and just deed all their holdings directly into a Wyoming LLC, but you lose a lot of protections this way. Youāll have no legal status in the state where the property is, so if you ever need to evict a tenant or sue a contractor, youāll be out of luck.
Set up a separate, state-based LLC for each and every property you own. That way, if youāre ever sued for damages that occur in one property, your liability doesnāt āspreadā to your other propertiesāeach is owned by a different company.
Now, hereās an important point. There are two ways an LLC can be set up to be managedāeither by manager or by members. In a manager-managed LLC, the manager makes all the decisions, and the managerās identity must be disclosed. Soā¦
3. Set up the state-based LLC as member-managed.
Now hereās the brilliant part:
4. List only one member for your second LLC, and make that member your holding company in Wyoming.
So now your state-specific LLC points back to the Wyoming LLC as its sole member. And the Wyoming LLC does not disclose your identity.
Youāve just created a structure that makes it extremely difficult for anyone to trace your property back to you. And thatās how to set up LLCs for real estate investing.
If you think thereās something underhanded about this, go back and read my blog post about privacy protection and why itās important. When you allow your property ownership to become public information, you become the ālow hanging fruitā that green-eyed attorneys go after anytime you become involved in any kind of litigation. You want to protect yourself better than that.
Thereās one caveat to the above strategy. It works best when youāre starting from scratch. If you already have some LLCs set up, you can run into some problems by switching over to this structure. Maybe weāll talk about that situationāand ways you can protect yourselfāin a future blog post.
Until then, happy investing.