Real Estate Syndication: You've Formed a Property LLC, Now What?

Congratulations! You’ve set up an LLC for your syndication property and taken an essential step toward protecting your hard-earned wealth. 

You’ve taken the time and expense to research everything on how to set up an entity to hold your real estate properly. Or better yet, you have consulted with an asset protection specialist who advised you where to set up the LLC, who should own it, who should manage it, and how this new LLC should interact with your other LLCs in your asset protection plan. But now what? Are you done? Can you go back to doing what you do best…finding the next deal?

Unfortunately, many asset protection specialists stop once the LLC is created and assume the LLC owner can finalize the process. They offer very little guidance on what to do next and much less explain the actual mechanics of how to do it.

So here they are .. 7 things you must do after creating your LLC.

Real Estate Syndication Tip #1: Transfer the Property into the LLC.

I know… I know. This sounds obvious, right? But you will be amazed at how many people take the time and expense to set up an LLC for asset protection purposes and then fail to transfer the asset into the LLC or worse yet, try and do it after a lawsuit arises. You have zero asset protection until you actually transfer the property into the LLC.

Make sure you transfer the property immediately! Remember, transferring the property into your LLC after a tenant accident will not provide you with any asset protection. Transferring the property after an incident is like putting on your seatbelt after the crash. It's too late.

Transferring your property into an LLC can sometimes be an onerous task as every County has its own filing procedures and costs which can lead to delays in filing if not appropriately submitted. This is why I usually recommend finding a local title company or transfer specialist to file the necessary paperwork for you.

The process involves preparing a warranty deed that transfers the property from you personally over to your LLC and any other County specific filing form. The forms are filed with the County Recorder’s office in the County where your property is located. 

A quick aside … avoid using Quit Claim Deeds to transfer the property into your LLC. In short, Quick Claim Deeds usually nullify the title insurance policy you obtained when the property was purchased in your name.

Real Estate Syndication Tip #2: Observe Corporate Formalities

Although LLCs are fairly informal and do not legally require as onerous corporate formalities as a corporation, there are some vital formalities you must follow. Otherwise, you will likely lose your liability protection.

Don’t Co-Mingle. In order to keep your liability protection, you must respect the fact that the LLC is a separate and distinct entity from you. Your liability protection will evaporate if you don’t treat them as one. No violation is more egregious and by far the quickest way to lose your liability protection than co-mingling your personal funds with the company funds.

This is why it is critical that you set up a separate bank account for your LLC (see below). Don’t use your LLC debit card to buy your groceries; don’t use your personal funds to buy items you need to run your business or pay for filings with the State.

Sign your Documents Properly. Anytime you sign a document in the name of the LLC, make sure the signature line contains the name of your LLC, and you are crystal clear that you are signing in your capacity as Manager. This is what a signature line should look like:

ABC Property, LLC

By:  John Doe, Manager

Draft an Operating Agreement. Although legally not required, every LLC should have its own properly drafted operating agreement. The LLC is super flexible, and you can run it however you want, but you need to put your LLC rules and procedures in the operating agreement. Not only should a good operating agreement contain strong asset protection language, but if you don't have one, the State will govern how your business is to be run. Having the government tell you how you must run your company is not something real estate investors are looking for. Get an Operating Agreement.

Have Your Initial Organizational Meeting. Your initial meeting (even with yourself) and accompanying initial resolution take care of all the initial matters like adopting your operating agreement, electing a manager, electing a registered agent, etc. 

Nolo Press has a great compliance resource that I personally use called “Your Limited Liability Company, an Operating Manual.”

Syndication Attorney Tip #3: Obtain an EIN.

An EIN (Employer Identification Number) is your LLC's social security number. Get one for every single LLC or other entity you create, even if you don’t plan on having any employees. Why?

The main reason is that you will want to open a bank account for your LLC, and the bank will require an EIN. You may also need one to file your taxes and register with departments of revenue (see below).

When applying for your EIN, you must determine how you want the LLC to be taxed. The nice thing about LLCs is that they are super flexible as to how they can be taxed. Most people don't know that an LLC can be taxed as a C-Corporation, S-Corporation, Partnership, or even as a disregarded entity. How do you know which one is the right one for you? You talk to your tax professional (see below).

Real Estate Syndication Tip #4: Open a Bank Account for each LLC

If you never intend to use the bank account, open one. This is especially true if you created your LLC in a State other than the State where the Property is located or you created a holding company for Charging Order Liability Protection (if you are unfamiliar with the critical Charging Order protection, I invite you to view a short free Asset Protection 101 video.

When you create your LLC in a strong asset protection state (like Wyoming or Nevada) since you don't live there, you will want to create as many connections with that State as possible so that in the event of a claim against you personally, a creditor that tries to come after your assets will have to contend with the strong laws of Wyoming or Nevada.

Opening and operating a bank account in Wyoming or Nevada (if that is where your LLC was created), is a simple way to add to that nexus with the State.

Even if you did not set up your LLC in another State, a bank account is yet another way to tell the world that your LLC is a separate and distinct entity from you and your other entities and thus, the separation should be respected for asset protection purposes.

And don’t forget to order a debit card. Many filings are done online, and having an LLC card will eliminate the temptation to pay with your personal card (co-mingling) for sake of convenience.

Syndication Attorney Tip #5: Meet with Your Tax Professional.

I recommend all my clients meet with their tax professionals before implementing their asset protection structure to determine the tax implications of setting up entities and meet with them halfway through the year to see whether any proactive steps can be taken to increase deductions and minimize taxes come filing time. As discussed above, there are significant tax considerations regarding how to tax your LLC. But there may be other tax considerations to take into account as soon as you create your LLC. 

Real Estate Syndication Tip #6: Don’t Forget to Register with the Department of Revenue and Register in any other State you are doing business with.

People often fail to realize that a State’s Department of Revenue and a State’s Secretary of State (where you filed your LLC) are separate departments that require their own filing. So states like Tennessee and Alabama, to name a few, require you to register your LLC with the Department of Revenue separately. Fail to register and your LLC will become non-compliant.

Syndication Attorney Tip #7: Keep Your LLC Compliant.

If your LLC is not compliant, your asset protection could be in jeopardy. Make sure you understand the specific requirements of the State where the LLC was formed. Almost all States require you to file an annual report with the Secretary of State, and some (like Nevada and California) require an initial filing of managers shortly after formation. Still others (like New York and Arizona) require some form of publication in local newspapers. And don’t forget to renew your registered agent.

Real Estate Syndication Tip #8: Insurance.

Just because you’ve set up an LLC for liability protection does not mean you get to skip the insurance. I recommend that all my Clients obtain insurance as this is your first line of defense. Your LLC is meant to act as a back-stop in the event your insurance isn't there to protect you. And trust me, it won't always be there.

Those who work with me know I have my issue with insurance. Mostly, many people spend years making their monthly premiums only to find out later (usually when a claim arises and is submitted to the insurance company) that they are not insured for the specific claim (insurance policies are full of exemptions and carve-outs).

You may also be underinsured. Your million or two-million-dollar insurance policy is likely insufficient in the event of a catastrophic loss (like the recent case at my Alma Matter, UC Berkeley, where a balcony collapsed killing 6 students.

Hopefully, this article provided you with some tips when it comes to leveraging your LLC to make big money now with your real estate syndication. While some of this stuff can seem a little technical, just a little basic knowledge goes a long way in saving your LLC from risk for liabilities. 

This blog post is intended to provide general information and should not be construed as, and does not constitute legal advice on any specific matter, nor does this message create an attorney-client relationship with Premier Law Group.