Purchasing Real Estate under LLC

**outdateboy** · 03-12-2010 02:26 PM

Hello,

I just formed my sole-member LLC with California SOS. The formation was confirmed by the SOS. Then i filled out the Statement of Information and named myself as the Chief Executive Officer.

Now I need to make a real estate purchase under the name of my LLC. The escrow officer asked me to provide Power of Attorney document. I am new to business and I am not sure what POA actually does. From what i read online, POA is for entitling person B to make decision and sign on behalf of person A. In my case, do i need to prepare a POA to entitle me to make decision on behalf of my LLC?

How do i get such a POA? Does it have to be done through a business attorney?

Also, besides the Statement of Information, how do i show the public that I have the authority to make decision for my LLC? When i opened my bank accounts, the bank only asked me for the article of organization, which only indicated that i am the "initial agent for service of process". Can the article of organization serve as POA?

Thanks a lot!!!
Outdateboy

**DerekS** · 03-12-2010 09:58 PM

As a member of your LLC, you should be able to sign any documents without a POA. At least that's my experience. I don't know why a POA has been requested. Perhaps I don't understand the way real estate transactions work in Cali.

How far along are you in the transaction? Do you have a ratified (executed) contract? Is this a cash deal? Being that your LLC is newly formed and has no established credit, any mortgage will likely have to be taken out in your own name. Maybe this has something to do with bridging the gap between you as an LLC member and you as a mortgagee.

Articles of Organization are completely different than a P.O.A. I'm not sure what an "escrow officer" is. In MD we use title attorneys to facilitate the transaction between buyers and sellers. Title attorneys can draft POAs, which are fairly commonplace in real estate transactions (when one party needs another to sign on their behalf.)

**GlobalWealth** · 03-13-2010 12:24 PM

Even though its too late for you, I am going to make a comment as hopefully it will help someone else reading. Do not form a CA LLC to own RE. It is the worst of the 50 states for registering an LLC. Not to mention its the most expensive. For holding RE, you need to register in either NV, WY, AK, or DE. There are lots of various reasons, but basically, there is no debtor protection in the state of CA. They allow foreclosure of business assets, even for a personal lawsuit. For example, if you are in a car crash in CA, the plaintiff attorney can sue you for damages and if you are found to own assets in an LLC, the courts can take ownership or force a liquidation of the assets held in a CA LLC. This is bad. Very bad. It offers zero protection. You could have just as easily formed an LLC in NV to own the RE and this would not be an issue. This is why it is important to find qualified professional assistance for business structuring advice. This is not DIY. At this stage, Derek can cut his losses and start over with a NV LLC, which is most advisable, because once you become a property owner, you become a litigation target. And while anyone can form an LLC, you also need a rock solid operating agreement, which most attorneys are incapable of producing. Most are useless pieces of garbage. Do your due diligence.

**Nigelp** · 03-17-2010 04:26 PM

To elaborate on what Bobby said.

Not only do you need a rock solid operating agreement. You need to properly document your LLC Member and board of Manager meetings (in a corporation its board of directors). Make sure you pass resolutions that cover all major corporate decisions example purchasing real estate.

If you did go with a NV LLC and wanted to purchase real estate in CA you would still need to file with CA as a foreign entity. Which adds complexity and may or may not be beneficial to you. Hire competent legal and tax advisors!

Back to your question.

If you bring in the resolution from your initial member meeting that you have been elected as a manager and the CEO of the LLC that is all the documentation the escrow company would need. Most escrow officers don't understand how LLCs or corporations work so they ask for forms that are not necessary. If they still insist that you have a POA ask if they can supply one. Sign it as a manager of the LLC giving yourself as CEO to purchase real estate of behalf of the LLC.

Make sure that everything you sign is as an officer of the LLC on behalf of the LLC Which would look something like the following.

Purchaser,
Outdateboy Real Estate, LLC
_____________________
OutDateBoy, CEO

Chances are you are going to personally guarantee the mortgage. This is another resolution that should be passed by the board of managers. The LLC is using your credit and name to secure funding. There should also be a contract between you and the LLC. What sort of compensation will you receive for the risk your placing yourself in personally?

I'm not an attorney! Please hire competent legal advisor who has experience in this area to handle a transaction like this.

LLCs and Corporations offer great asset and tax advantages only if the proper formalities are observer and recorded.

Make it a great day!
Nigel

**outdateboy** · 03-17-2010 11:39 PM

Thanks everyone for the answers. The info has been so helpful.

Are you saying that even though my LLC is a single-member LLC, i still need all the minutes to document the decisions? I don't even have an assistant to keep minutes. So in the minutes, the attendee will be just myself, is that correct?

**jmandgroup** · 03-18-2010 02:01 AM

Global Wealth Protection LLC stop freaking people out. What GWP forgets to say is that your assets are not shielded because you are single member LLC. Because you are a single member LLC you are still consider a sole proprietorship. What you need to make sure you do is elect to be taxed as a corporation. This is beneficial to you because you are allowed to keep an amount I believe up to 60k in the company at a lower tax bracket. Do not worry about the double taxation issue unless you believe you be giving dividends to yourself. I would also suggest getting another partner (friend, mom, wife, husband, any close) and give them 1% of the company and you are not a single member LLC anymore.

No you do not need to keep minutes because you are not a corporation.

Reference: Helped put together a SoCal LLC for a General Contractor using LLC under corporate tax structure, Limited Liability Company (LLC)

**GlobalWealth** · 03-18-2010 06:46 AM

Originally Posted by Nigelp

If you did go with a NV LLC and wanted to purchase real estate in CA you would still need to file with CA as a foreign entity. Which adds complexity and may or may not be beneficial to you. Hire competent legal and tax advisors!

Nigel

Actually, this part is incorrect. For ownership of an asset, you absolutely do not need to register with the CA secretary of state (SOS). You would need to file with the CA SOS if you are registering an operating company, but not if it is only used to own an asset. But for most RE investors, you segregate your operating activitiy from your asset ownership. This is the proper way to structure your asset protection plan.

**DerekS** · 03-18-2010 04:40 PM

I have never seen documents signed at settlement as "CEO" or
"manager" of an LLC. Parties sign as members.

**GlobalWealth** · 03-19-2010 04:14 AM

Originally Posted by jmandgroup

Global Wealth Protection LLC stop freaking people out. What GWP forgets to say is that your assets are not shielded because you are single member LLC. Because you are a single member LLC you are still consider a sole proprietorship. What you need to make sure you do is elect to be taxed as a corporation. This is beneficial to you because you are allowed to keep an amount I believe up to 60k in the company at a lower tax bracket. Do not worry about the double taxation issue unless you believe you be giving dividends to yourself. I would also suggest getting another partner (friend, mom, wife, husband, any close) and give them 1% of the company and you are not a single member LLC anymore.

No you do not need to keep minutes because you are not a corporation.

Reference: Helped put together a SoCal LLC for a General Contractor using LLC under corporate tax structure, Limited Liability Company (LLC)

Again, this is false information. A properly formed Single Member LLC is a great asset protection tool. There has been a case in CO where a SMLLC was considered a sole proprietor and the LLC assets were attached in a judgment, but there were legal issues involved with the LLC. It did not have a good operating agreement. It had a 'boilerplate' operating agreement, plus CO is not a good state for LLC registration. I have many, many clients with SMLLC's who have been tested, and won, in court.

For taxation, you can elect to be taxed as a corporation, or as a s-corp. In most cases, s-corp tax is better, but consult your CPA. While you don't have double taxation issues with c-corp status as long as you don't pay dividends, there are several downsides to this tax status like the inability to pass through losses onto your personal tax return. If you are a real estate investor, this is very, very important.

And I am not trying to 'freak people out'. there is an enormous amount of wrong information (including yours) about LLC's. This is a common problem as many people starting an LLC think all LLC's are created equal. This is 100% false. If formed improperly, they offer little or no asset protection. As previously stated, you need to form them in the right state and have a rock solid operating agreement. This is especially true if the LLC is to own assets like real estate or an investment portfolio.

**jmandgroup** · 03-21-2010 09:54 PM

Originally Posted by GlobalWealth

Again, this is false information. A properly formed Single Member LLC is a great asset protection tool. There has been a case in CO where a SMLLC was considered a sole proprietor and the LLC assets were attached in a judgment, but there were legal issues involved with the LLC. It did not have a good operating agreement. It had a 'boilerplate' operating agreement, plus CO is not a good state for LLC registration. I have many, many clients with SMLLC's who have been tested, and won, in court.

For taxation, you can elect to be taxed as a corporation, or as a s-corp. In most cases, s-corp tax is better, but consult your CPA. While you don't have double taxation issues with c-corp status as long as you don't pay dividends, there are several downsides to this tax status like the inability to pass through losses onto your personal tax return. If you are a real estate investor, this is very, very important.

And I am not trying to 'freak people out'. there is an enormous amount of wrong information (including yours) about LLC's. This is a common problem as many people starting an LLC think all LLC's are created equal. This is 100% false. If formed improperly, they offer little or no asset protection. As previously stated, you need to form them in the right state and have a rock solid operating agreement. This is especially true if the LLC is to own assets like real estate or an investment portfolio.

Per the State of California: "For California income tax purposes, an LLC with more than one member will be classified as a partnership, and an LLC with a single individual member will be treated as a sole proprietorship, unless the LLC chooses to be classified as a corporation for income tax purposes." and "If the LLC has a single member, it will be disregarded as separate from its owner, and will be treated as a sole proprietorship or a division of its owner, unless it elects to be taxable as a corporation. " Ref. Limited Liability Company (LLC)

You are telling me I am giving incorrect information. Than you should know that the State of California does not allow S LLC to be formed in California.

**outdateboy** · 03-26-2010 10:37 PM

Originally Posted by GlobalWealth

Actually, this part is incorrect. For ownership of an asset, you absolutely do not need to register with the CA secretary of state (SOS). You would need to file with the CA SOS if you are registering an operating company, but not if it is only used to own an asset. But for most RE investors, you segregate your operating activitiy from your asset ownership. This is the proper way to structure your asset protection plan.

I am trying to imagine how to form an LLC just for the purpose of owning assets without "operating". Is "hireing a CA contractor to do repair work on a CA property" considered operating in CA? How about "hiring an real estate broker to sell an asset" in CA? It seems impossible to own a CA asset without operating in CA. You have to service the asset one way or another, right? I humbly ask you to give for an example of how to own CA asset without registering with CA SOS as a foreign entity.

**GlobalWealth** · 03-27-2010 04:57 AM

Originally Posted by jmandgroup

Per the State of California: "For California income tax purposes, an LLC with more than one member will be classified as a partnership, and an LLC with a single individual member will be treated as a sole proprietorship, unless the LLC chooses to be classified as a corporation for income tax purposes." and "If the LLC has a single member, it will be disregarded as separate from its owner, and will be treated as a sole proprietorship or a division of its owner, unless it elects to be taxable as a corporation. " Ref. Limited Liability Company (LLC)

You are telling me I am giving incorrect information. Than you should know that the State of California does not allow S LLC to be formed in California.

I've been doing this for quite a while and my partner has been doing this much longer and he lives in CA. CA does allow single member LLC's.

**GlobalWealth** · 03-27-2010 05:03 AM

Originally Posted by outdateboy

I am trying to imagine how to form an LLC just for the purpose of owning assets without "operating". Is "hireing a CA contractor to do repair work on a CA property" considered operating in CA? How about "hiring an real estate broker to sell an asset" in CA? It seems impossible to own a CA asset without operating in CA. You have to service the asset one way or another, right? I humbly ask you to give for an example of how to own CA asset without registering with CA SOS as a foreign entity.

To simplify a bit, an operating company is one that has earned income. If your RE has passive income from rentals, this is considered passive income. Of course if your property needs a new roof, you must hire a contractor to repair it, but this has nothing to do with the classification of income. I have many clients who are RE investors, and we never, ever file their LLC's in their home state. NV is usually the best, but if the client lived in NV, we would use WY or DE (also very good).

If you had a business that owned RE and also did property management, then you would need to separate the ownership of the assets, which you should do anyway for liability purposes. Ideally, you would have each property or group of properties owned by a NV, WY or DE LLC. You would then have another NV, WY, or DE LLC for your property management business, but you would need to register this one in CA as a foreign entity. But you would not register the one that owned the RE in CA. I hope this helps. If not, let me know and I will try to clarify or you can ask a more specific question and I can answer that.

**outdateboy** · 03-28-2010 01:52 PM

Just want to report back how the transaction went. It turns out I don't need a POA. As soon as i showed my article of organization, operating agreement to the escrow officer, i could sign the document as a managing member.

I am still interested in knowing more about asset protection. I want to be in the business of rehabing properties (buy, fix, sell). Is that considered as "operating" in California? It seems the income i derive from this business is not passive and therefore considered "operating income". Following the discussion, it seems that even if i form the company in NV, i will need to register as a foreign entity in CA since i am "operating" in CA. Thus, i will need to pay CA income tax. Is that correct?

If my company is purely meant to hold CA rentals, i can form the entity in NV, purchase CA properties, hire CA contractors to do repair, receive passive rental income in CA, WITHOUT registering as foreign entity in CA, WITHOUT paying CA income tax on the passive income. Is this correct?

Thanks so much! I learnt a lot in this thread.

**GlobalWealth** · 03-30-2010 09:35 AM

Originally Posted by outdateboy

Just want to report back how the transaction went. It turns out I don't need a POA. As soon as i showed my article of organization, operating agreement to the escrow officer, i could sign the document as a managing member.

I am still interested in knowing more about asset protection. I want to be in the business of rehabing properties (buy, fix, sell). Is that considered as "operating" in California? It seems the income i derive from this business is not passive and therefore considered "operating income". Following the discussion, it seems that even if i form the company in NV, i will need to register as a foreign entity in CA since i am "operating" in CA. Thus, i will need to pay CA income tax. Is that correct?

If my company is purely meant to hold CA rentals, i can form the entity in NV, purchase CA properties, hire CA contractors to do repair, receive passive rental income in CA, WITHOUT registering as foreign entity in CA, WITHOUT paying CA income tax on the passive income. Is this correct?

Thanks so much! I learnt a lot in this thread.

I will address these questions one at a time.

For rehabbing properties, part of this is passive, part earned. You could form a NV LLC to buy/sell the property and any gain would be considered passive. Then you would form a CA company (or NV LLC and register in CA) as the 'worker' company that produces earned income. The NV LLC would pay the CA company for the work performed. This separates the entities and segregates the liability, which is critical in asset protection.

As far as tax goes, an LLC is a pass through entity so the income/loss flows through to you personally and you will pay tax in your state of residence.

For owning property strictly for CA rentals, this can be done through a NV LLC as this entirely passive income. If you hire a CA contractor to fix a roof, then this is no problem. This is just a business expense, but considering the type of income, this is common. Nearly all of my RE investor clients use either NV, WY, or DE LLCs to own property.