How to Invest in Commercial Real Estate

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Episode #025 - Entity Structure in Commercial Real Estate - How to form a LLC

by Criterion, Braden Cheek, Brian Duck
March 4th 2021

On today's episode we go over basic entity structure in commercial real estate and how to form a LLC (Limited Liability Company). We have our hosts Brian Duck and Braden Cheek from The Criterion Fu... More

Yeah so forming an LLC. Getting an E. I. N. Number is literally 10 10 15 minutes. I could do it in less time than it took us to record the show. Well This is important because a lot of people listening are going to think Oh my God forming a company, you formed a company. Do I need an attorney? I'm gonna have to pay the attorney $3,000 to handle all of the paperwork. And so what we want to talk about today and Britain, you're gonna go through it is how easy it is to form an LLC. It's so easy. It's it's cheap. You don't have to have an attorney and you don't have to pay a bunch of money. Mhm. Hello? Hello? What is up? Welcome back to how to invest in commercial real estate. And this is episode 25 where we're going to take a deep dive into why you need an L. L. C. Brian? Why do we need an L. C. Well you got a former company? Right. And so we've looked at different types of companies s corpse, the corpse. And in our investigation we found that an L. L. C. Is the best route to go. We'll take a step back. Uh You say you need to form a company. Why can't I just go by by my commercial real estate. Yeah.

So you're not just putting this in your personal name. You know you're not going to find a commercial real estate deal and just saying, hey i is bright and cheek. I'm just going to buy this title that as Britain cheek, There's you want some sort of protection, you want a business entity that's that's gonna be separate from you personally. And so why does an LLC do that? An LLC can protect you personally? Absolutely. Yeah. So um the L. L. C. Protects you as a person because that business is the one that did it. So you can ensure the business, you can separate it, you separate the accounting, you separate the shareholders, you separate the investments. I mean everything is kind of separate so every liability that that company has doesn't flow down to you as as uh as an individual that. Yeah, so an LLC literally stands for a limited liability company. So lost lawsuits, bankruptcy, that type of thing. You're not personally liable for absolutely foreclosure, um non recourse debt. Even with the L. C. Yeah, we've we've been sued a few times just with all of the uh property that we own, multi family.

People slip and fall um various property damage, things like that. And so they don't sue us personally. I'm not defending myself, we defend the company and our insurance company defends the company. Okay, so only the assets of the company are at stake. That's right. Yeah. And even when you're when you're getting debt and buying the property, they want to see the articles of organization for the company. They want to see the companies operating agreement. They want to see the information for the company because the company is the one getting the debt for the property because the company or the LLC is the one acquiring the asset. Right? So you go find this new property. And let's say it's what's the name for a property? We got Aspen center. All right. Let's say you went and bought Aspen center. You're gonna, you're gonna form an LLC called Aspen center LLC. That's probably step one. If you want to write it down, name it. So you have Aspen center, you can name, you can name it whatever you want. I think our first time we we named Lafortune Properties LLC and we bought these apartment complex that were in the Lafortune area of Tulsa Oklahoma.

But as we, as we bought more and more, we, we found it easier to incorporate the name of the center into the LLC because it helps keep everything straight. And I don't have to know. I don't have to guess what property. Aspen center, retail LLC owns. Uh, so we found that works obviously if you have a master LLC like ours is precision equity and precision equity owns. You know, a steak and all of these individual llcs than that, that you can be more creative. But we, we, we have a good, it works for us to, to pick a name that is associated with the process. A little stipulation there. You say you can name it whatever you want to, but you just have to make sure that that name is not already taken right now. Usually if you name it after the center, like you're saying that's probably not taken. But you do need to search at least in Oklahoma. You do need to search and make sure that that name is not already taken. Yeah or whatever state or anything close to it. Actually a lot of times if it's it's as if the name is close to something else, they'll reject that names. Uh Secretary of State. So uh we have we've talked about the liability and why we need to have a company to buy real estate but why is an LLC preferred versus C.

Corp or an s corp or sole proprietor LLC. Yeah so one of the biggest reasons for me is the limited liability companies to pass through entity when it comes to taxes. So the company or the L. C. will have a net profit or a net loss. And if you own 50% of that company, you personally, The taxes passed through down to you as a 50% owner. So that LLC at $100,000 profit and you own 50% of it, you would get a K. One for a $50,000 profit. Um similar to a 10 90 nine. Okay so that company doesn't have to file a tax return, is that right? It does have file a tax return. It just doesn't have to pay taxes the members of the L. C. Or the owners of the L. C. Pay the taxes on behalf of the company. Whereas an SRC corp are taxed directly and then the members are taxed. Okay? So if the company still has to pay taxes then do you have to go get employee identification number for that company? You do? Okay. How do you do that? Yeah. So for me an LLC getting any I. N. Number is literally 10 10 15 minutes.

I could do it in less time than it took us to record the show. This is important because a lot of people listening are going to think, Oh my God forming a company, you formed a company. Do I need an attorney? I'm gonna have to pay the attorney, you know $3,000 to handle all of the paperwork. And so what we want to talk about today and Britain you're going to go through it is how easy it is to form an LLC. It's it's so easy. It's it's cheap. You don't have to have an attorney and you don't have to pay a bunch of money. Okay so we kind of, we kind of said step one was to choose a name. Is that what we said, choose a name. Okay you've chosen the name. What's Step two, go to google and type in your States name space. Secretary of State. And then the first website that pops up is gonna be the Secretary of State website. You go in there and there's going to be, you know a form an entity. It's going to ask you what sort of NC and you're gonna say LLC and then it's just gonna ask you 15, 20 questions about who you are, how many members are and how you want to be taxed um you know these different these different things, anybody can do it. The easy questions if you don't know the answers about your, I mean you should know the answer is it's gonna ask if you sell cigarettes, it's gonna ask if you have, you know drivers regularly or if you tow things or if you sell things over state lines, you know, they're pretty simple questions where the biggest for minustah by commercial real estate.

The answer to almost all of those questions is no, because you're not really running an interstate commerce business, it's a holdings company. In reality you're not paying uh you know, sales tax or or anything like that. You don't have employees will be really easy for you guys. So okay, keep Going. So 10 minutes in, you've answered the questions at the end, you're going to type your name as your signature and you're gonna say in the state of Oklahoma. It's super easy. They literally give it to you immediately, you're able to download it after all the questions you get articles of organization, I mean what does that, what does that look like for those that just don't don't know, um you get an L. L. C. They give you articles of incorporation, what is that? Yeah, so it's a one page piece of paper will throw it up on the screen here that says articles of organization. It's got a fun see a bunch of fancy and bossing and Secretary of state of your state's signature on it and it says this, the company is hereby incorporated as of this date. So it exists in Oklahoma exactly the next step after you have that, which there's another important document you get the articles of organization but the more important one is the articles of filing and that's just the pdf print out of all the questions you answered um going over it and it has the registered agent which is just who the person that is making decisions on behalf of the business.

You know, if you if you need to get sued or if you need to be served something or or if so who, who does that because I know that's come up with us and some lawsuits on who the registered asian is, do you want that to be yourself or do you want that to be someone else? Yeah, so in the state of Oklahoma and a lot of other states you can use a company as a registered agent for companies. Right? So what we typically do is you know the criterion, phone is the registered agent for all of our other companies because we're the managing partner and all of those companies. So in reality if you need to send a notice, you don't need to send it to aspen center LLC. I'm the registered agent for that company and go and send it to me. I've seen people use attorneys law firms. I've seen people use themselves personally. The only reason I wouldn't use myself personally, it's just so if somebody looks at my company name, they don't see brad and cheek and you know my address, they see the criterion fund and my company's address. I guess some people have used attorneys just because it may be it makes them harder to contact and in the event of a lawsuit or what. Yeah. Which is another reason some people may use LLcs is just so many layers, you know to keep maybe their ownership private or what they're involved in private or or you know the body's harder to find.

I don't know. I don't know. Maybe they've been divorced so many times. You know, they just, they got to constantly hide everything. I don't know. I don't think it's a problem to register uh your yourself or your company. No because if somebody needs to get a hold of you that's how they're gonna do it. Exactly. Yeah it's gonna figure it out. Um So the next step is getting the federal employee identification number F. E. I. N. Your tax I. D. Is also what it's called. You go to the I. R. S. Website for that I suppose. Yes. Um Big big the millions of dollars that has to be made off of the scammers to register companies and get E. I. N. Numbers. It is ridiculous. Only go directly to the I. R. S. Site. Only go directly to your state government website. Because there is so many other companies that will send you a mail for like A male newsletter that says you can renew your company for $300 today, fill out this form and its $26 online. So people also heard people say that they have to go to oil in Oklahoma. They have to go to the capital. Uh There's some offices you gotta go the secretary of state office.

That's insane. And there's so you take your articles of organization and you can just then you go to the I. R. S. Website and get yuri I register for your eye on, it's all online. Whereas your state, what's your company name? What is the date that you got approved? You know who's the owner? What's your social and then you hit download and it Populates a 10 digit number. So for those that don't know an E. I. N. Is like a social security number for the LLC. For the company. So it's nothing more than that. It's something you file your taxes with it just as identifies that as kind of an individual in the tax system. Yeah that's all that's all we have social security numbers for us to pay taxes. Yeah. Same thing. The company they need ei and they pay taxes. Okay. And so the I. R. S. The I. N. Number. That's that's immediate. Right? Okay. That's a media. You can get it mailed to you if you like. Um you know, I'm sure they could fax it to you if you want it. But uh yeah you can download it immediately. Okay? God Blast. Man. I mean just to easy yeah. Um Yes now you've got a legally registered company within 10 15 minutes in your state, your legally registered according to the I.

R. S. You can pay taxes. They're expecting that tax return. Once you get this. By the way. I thought the in the state of at least in the state of Oklahoma, it's not it's not immediate is it? Don't think you need to look at it, make sure your names okay? That you've you've got all the information. Worst case scenario. It's 24 hours. Okay? Yeah but it's it's within I mean sometimes within hours they have rejected a few of our names before because they're too close to another business name. Then you have to change it a little bit. Yeah. Did we mention that there's a search typically so you can write in the name that you want to uh call your company. Hit the search bar and it'll tell you what's the closest uh name to your to your company that you're wanting to use and then you can decide right there. Oh well someone's got that exact same name, it's going to get rejected or of the closest name is not even close to what I want to call it. So I'm I know I'm good. Yeah. Everybody everybody's got a naming convention, they definitely have certain parts. What I've found is that when you only use the name of the property, um you know, typically somebody's own that property before, sometimes multiple times, sometimes they kind of have the same idea.

It's not a bad idea, you know what I mean? And then you just run into the problem when you have okay, you know, multiple naming things. So like ours we do, you know the criterion fund in the name of the property then the city, I mean it's fail proof. So come up with this system, it's pretty easy. And like Joel said you do that, you can keep track of it when you've got a dozen of these things and you just named it, You know, Awesomeness Investments one you I've got six, forget which property that is right. Yeah. To throw another curve ball and awesomeness, one may have bought two properties and then you figure out which two, yes, just gets harry. All right, so now you've got your E. I. N. What's the next, what's the next step? Yes. So now you've you've got your company, you you're you're set another ready to go positive for an L. L. C. Is that it can be a partnership? You know we're sole proprietor. Uh You may not be able to have more members, but the LLC doesn't restrict you there so you can form the partnership however you want. And where where would that be done? Well don't you do it with this? Is that with the secretary of state? I think you were you were talking about answering all these questions.

I think one thing that it asks is okay you want to do an L. L. C. And how are you gonna form, how are you going to organize that LLC their sole proprietor ship? Like joe was saying general partnership. Um And sometimes people don't know. So just to clarify, a sole proprietorship is uh an individual or a married couple is typically a sole proprietorship. And if you have more than one um member then that's going to be a general partnership, is that right? And uh um you know a big thing is they use a different form, you know sole proprietors on a schedule c on their tax return. Um And then um an LLC taxes a partnership. Um It gets a K. One because there's multiple members. So yeah I think it matters. Um We typically always have multi member LLcs taxed as partnerships which just says you know if there's 100% of this company, we have 10 partners, each partner is 10% of it and we made $100,000 that year. Each partner gets K. one for $10,000. Yeah it's pretty easy. Yeah. One thing I think also I don't know why you might want to change but people should know that if you are in an L.

L. C. And you decide later on or your accountant decides, hey I think you'd be better as an S. Corp or a C. Corp. You can make that change once you designate it it's that's not forever. You can point you can have your accountant easily file the paperwork to make that change. So don't be afraid. Start as an LLC if you want. Of course obviously you probably wanna get some input from your account before you do this. But but don't be don't be afraid that that you've got to be an L. C. And you can't change anything uh from now. And it's an easy change. Yeah I'll get some um I'll get a slide to throw up right here because there's there's so many llcs and one commercial real estate investment. You may have a dozen, you may have a dozen. Right because I'm going to have an L. L. C. Is a sponsor to protect myself that owns a portion of the property I'm buying which is a separate LLC, right? And then my investors there may be however many of those, they are all going to have separate LLC's because most of our investors invest through some sort of retirement vehicles, some sort of trust, some sort of investment entity, right?

Like, um, you know, brian duck, maybe duck LLC, you know, that you run all of your passive passive investments that was taken by the way, so nobody can take that just to let you know, don't waste your time. Yeah. So, you know, if something happens with one of those, they're not suing brian Duck, you know, they're suing that entity and it's just all of these different layers of protection. And, and it can be complicated, but you just write it down, it's really, it sounds complicated that the LLC is really, really simple, but to wrap this show up and to tell people what they do next, the LLC is the company, but the workings of the company and the structure of the company all comes through an operating agreement and, and that you may have an attorney help you with, um, or get a really good sample, but that's the next step. And maybe another episode is the operating agreement lays out exactly how the LLC is set up, how it works, what the ownership structure is, uh, how everything the funds work, Who does the taxes, all of that stuff. So if you, uh, if you own this company, just by yourself, do you still need an operating agreement?

Do you guys think? I think so. Just to make it clear, I mean, if you're the only owner, you probably don't need an operating agreement. Um It's a formality, but it it's, it's nice to have because if you wanted to sell that company, if you wanted to allow somebody to buy in at that at a different time at a different rate, you know, if you're planning on owning 100% of it forever. If you, if you die, um, the operating agreement, you know, could give instructions on how, how it lives on. Yeah. So I think it's always good to have it and that's not that complicated either. But it is way more comprehensive than just forming the LLC. Yeah. Typically not a real expensive thing right to get an attorney to do. No worst case scenario, you pay, you know, $1,015 in the beginning and then you can recycle it forever. But when I say, where's case scenario like you can download some offline, you know, if you email me and nice ask nice enough, I may just give you mine. But I mean they're pretty easy and it will be less if you start with a template and have an attorney help change it. So yeah. And, and I mean it's just, they're, they're different. They're all different.

You know what I mean? You have entities that invest in entities and then those entities have entities in them. And it's just complicated. Yeah. But you write it down, you go on that Secretary of State website, you have an accountant that keeps track of all of it and files her taxes. I mean K. Ones go to that entity and that entity gives K. Wants this and see and then that entity ultimately passes down to me and then that's where I'm getting, You know tax around. But anyway it's it's easy to do. It's easy to get a hold of. You don't have to go to the Secretary of State's website. You don't have to wait forever. It's not thousands of dollars for an entity or an operating agreement or anything like that. It's 10 minutes some Google searching and you are legally registered to pay taxes to run a business to distribute. I mean whatever you need to awesome. Only 10 minutes of time. And and basically you form your company. It's done. Yeah. Alright. Anyway that is it. That is a deep diving Elsie why you need one. Make sure to check us out on the web how to invest in CRE dot com. Like and subscribe. Turn a little bell for the notifications. Who get notifications of uploads and we will see you guys next week.

Thanks. Yeah.

Episode #025 - Entity Structure in Commercial Real Estate - How to form a LLC
Episode #025 - Entity Structure in Commercial Real Estate - How to form a LLC
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