Too small to create an LLC?

Question

I own five single family homes in the Twin Cities area (Minnesota) and am trying to learn if creating an LLC and transfering these five houses to the LLC is a good decision and worth the time and money for such a small portfolio.

I currently have a $1M umbrella policy with my home owners insurance company but am wondering if one additional layer of protection would be prudent.

If I should create an LLC, should I create one for each property and another to hold the five LLC's?  Are there any tax advantages to moving to this legal structure?

Will Barnard · Answer

If you have 5 properties you are holding as rentals, any competant accountant/attorney would demand you open an LLC to hold them in (or multiple if the equity position was high enough to justify multiple entities.

As to tax benefits, LLC's are "pass-through entities" so they do not provide "tax benefits" however, since landlording is holding an asset "long-term", the tax benefits are that you are taxed at sale on the capital gains at a lower rate than ordinary income levels.

S-Corps are best for flipping and you only need ONE! Do not listen to the guris and start a C-Corp!

Nathan Emmert · Answer

LOL, nah, it's new :)

Rule of thumb I've read is 1 LLC for every $250k in equity.  That might cover all your properties or it might require 1 each.

I would advise talking to a lawyer on the LLC.  If you do it wrong (not funding it well enough for example) it can provide next to no liability protection.  They are good tools, but must be employed properly to work.

Bill Walston · Answer

It sounds like you're getting your corporations confused. It is the
  C-Corporation that  pays dividends to shareholders, not the
S-Corporation.

Cash paid to S-corporation shareholders, in general, is called a distribution.  And distributions are not taxed at the time they are paid.  That's because the S-Corporation is a pass through entity and you pay taxes on the profits of the business at your individual tax rates.  The cash is actually a distribuption of "previously taxed income."  There are a few exceptions to this general rule, but aren't relevant to this discussion.

Drew Whitson · Answer

The only tax advantage I can think of would be if the LLC was taxed as an S-Corp and some of the income was distributed to me from the S-Corp as dividends which are taxed at a much lower rate than ordinary income.

Steven Hamilton II · Answer

John W.,

Do some searching here on the forums and you will find a wealth of information.  A S-corp is the necessarily the BEST for flipping.  Much of this depends upon your complete situation and goals.

-Steven the Tax Guy

John Woodman · Answer

Why do you say that s-corps are best for flipping?

Bienes Raices · Answer

That is what I was thinking...

Are you planning to buy more properties, or stop at five? That might help answer your question.  From my point of view, once you have 10 more more properties it's insane to continue with a "one LLC per property" plan.

There are also other techniques like equity stripping the properties through loans and liens before you transfer them into the LLC(s). That way you would be taking less of a risk by having several properties in one LLC, and you would have less bookkeeping and filing fees to deal with. You just have to make sure the LLC doesn't become undercapitalized when you do this.

Bienes Raices · Answer

Is this true? I thought LLCs were generally treated as pass-through entities by IRS.

Bienes Raices · Answer

I think you are talking about the "management company/holding company" scenario? I looked into that but my insurance agent said the carriers would not insure an arrangement like that. Maybe if I looked harder I could have found insurance, but I decided to drop the idea. Besides, that's a lot of LLC filing fees to have to pay each year.

Too small to create an LLC?

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