As a real estate investor, you've heard that the LLC (Limited Liability Company) is powerful asset protection vehicle. It essentially forms a wall that shields individual owners from personal liability. In short, if you happen to be sued by a tenant or property guest for something that happened on your property, your own personal assets are not at risk.
After recognizing the need to form an LLC, the natural question is: when is the best time for me to form an LLC? This question takes on even more significance given the fact that the end of the year is rapidly approaching… Is it better to form an LLC now in 2010 or wait until 2011?
It's an important question, and there are several things to consider. For starters, how serious is your risk and liability concern? After all, protecting your personal assets is a key reason for forming an LLC in the first place. And the sooner you form an LLC, the sooner you can start reaping the rewards (i.e. legal protection). If you already have tenants or vacation renters at the property in question, it's best to form an LLC right away.
However, if you don't see a pressing need for liability protection over the next 1-2 months, you might be better served waiting until 2011. And here's why. Your LLC's start date is not retroactive – meaning you won't get any tax advantages by incorporating in December. And in some cases, you may end up paying business fees for 2010 (and have to file an Annual Statement) even though you've only been incorporated for one month of the year.
But bear in mind that January is the absolute busiest time of the year for your state's filing office. And your application will be at the mercy of any backlog.
Fortunately, there's an interesting option that can put you in the front of the line come January. Some document filing services offer a ‘Delayed Filing' option that lets you submit your application now and then delay your actual incorporation date until the new year. In essence, the document filing service holds your paperwork and then files it with the secretary of state on the first business day of 2011.
In this case, you can avoid having to file an annual report and any fees for 2010, while choosing the effective date of your LLC formation for 2011. Of course, if you feel you need the legal protection sooner rather than later, I always advise to err on the side of caution. There's literally no time like the present.