BiggerPockets

An LLC can be pierced and you held liable personally if it is deemed not a real business. Whether this will happen is a case by case basis. Real businesses have, their own location, their own phone number, their own banking accounts, equity and insurance, books etc.

Will missing one of those this mean your LLC will be pierced, not necessarily? However the fewer corporate formalities you follow the higher your risk.

Another factor is, how liberal are the courts in your state? I suspect I am at much higher liability risk in Maryland than are Landlords in Texas.

Ned Carey

I keep every property in a separate entity for both accounting and for liability purposes.

-Steven

The issue you have which was touched on but I will highlight more is you are a single member LLC. As far as the IRS is concerned you are a disregarded entity and are treated like a sole proprietorship. As noted above, some states do not allow the formation of a single member LLC at all. A simple remedy is to add your spouse or relative into the LLC which then forces it to qualify as a partnership.

As far as liability protection, the LLC affords you the same protection as other incorporated entities including asset protection of personal assets and charging orders on the assets of the company.

If/when the concept is ever challenged due to some legal complaint or civil compliant then the examination of each LLC will take place. If each LLC functions as a stand alone operation which not only includes bank accounts, but also meeting minutes and proper resolution documentation like operating agreements and alike then they will be viewed and treated as separate entities and the only charging orders could apply.

If you fail to keep those books and records then the court may knock you back down to a sole proprietorship and reject granting you the limitation of liability of your personal assets and those of the companies.

The use of single-member LLC to hold title to individual real estate assets (as opposed to multiple properties being titled in the name of one entity or individual) is used to limit liability risk, creating "bankruptcy-remote" special purpose entity standards, and also to facilitate tax-deferred, like-kind exchanges under Section 1031 of the Internal Revenue Code.

How you structure the ownership of the asset LLC and management LLC is sort of up to you. The asset LLC could be owned by the manager LLC as a subsidiary, which functions as a compartmentalization of the liability of the asset. It is possible to setup a partial interest from the manager LLC and the rest to you as the natural person, who we will refer to as the investor. The investor can be a natural person or multiple natural people or other LLC. Putting the manager LLC gives authority to the manager over the assets or you will have to document out the relationship just like you would with stand alone manager. For each asset LLC.

And there in lies a little bit of a trap. If your asset LLC rolls up into your manager LLC and pays you as the investor you will have a little less administration over all of the business activity. Since the manager, who manages, has an interest in every LLC the manager could make capital expenditures as an owner of each LLC. If the manager is not, then you have to debit and credit the manager just like a third party. That little concept can pierce the veil if not followed.

If the manager makes a capital advance and you do not properly credit and debit each LLC, then you have co-mingled funds. You are now one entity. Ok, well it's not that black and white but you get the idea. If life get's in the way and you don't treat each and every unrelated entity as an unrelated entity, you can loose the unrelated concept and they might be able to pierce the shell.

As Will pointed out, using the manager LLC to collect and be the public brand is fine. He also added, you must remit to the actual asset LLC. The asset LLC must then remit to you the owner.

So, to summarize my winded ten cents. When you form single member LLC, that is a bit of loophole. What you are saying to the world is that LLC is separate from me and my personal assets. So then, once you make that statement, you must live up to it. The entity must be different than you and any other entity you own. It must act like it does not know you and treat you as any third party business would in the market place. No co-mingle funds, separate bank accounts, separate operating agreements, etc, etc.

In my suggestion, with the manager as an interest in the LLC. You remove a little bit of administrative red tape. The manager is an owner in the asset LLC, can go in its bank account, can get paid and can advance capital as an owner. Fundamentally the manager could be treated as an asset manager and capital manager. Where it manages your money, the investor money, in the assets held in each asset LLC.

I will let Dion answer your question directed at him.

I do need to clarify something on this:

Or would it still be required to have a seperate checking account for each llc and the management company can pay bills for the other LLCs and just disburse to them their net income once a year as @Will Barnard stated?

I never said it would be paid once per year. Typically, rent checks come every month and as collected by the management LLC, it would then need to send proceeds to each holding LLC EACH MONTH, not once a year.

Originally posted by @Brian Hoyt:
I know this is askew of topic, but if you have several (say 10) properties under seperate LLC's and you want to borrow some or all of the money from each LLC's bank account to something (like maybe another property) how is that accounted for from a legal and taxation standpoint?

Brian Hoyt, there's no one simple answer to that question. It would be treated in one of several ways depending on the tax status(es) of the LLCs and who or what entity is "borrowing" the money. For example, if the LLCs are treated as corporations it could be a loan between entities. If the LLCs are disregarded it could be a treated as a withdrawal by the owner/partner.

As to the most efficient setup;

First, define what you want to do. No offense people but, I can't believe how haphazardly people set up business structures with superficial thought given to an overall plan.

You'll find in RE that no one just does one thing but you'll need to accomplish several strategies. A landlord buys and will at some point sell, they will finance, manage, repair, renovate, they may employ others to find properties, the may end up doing lease options, seller financing, you might sell the note, you might find a heck of a deal and decide not to hold it but flip it....you get the idea.

A capital company can do all of these things as the top of a pyramid or on a lateral structure.

Besides comingling funds another way to blow up your corporate veil is to operate outside the purpose of the initial stated business. While every attorney drafting any filing will utilize the catch all phrase...to do all things necessary and related...(or similar) you can easily get into other business operations that can change the flavor and business code of what you did. For example, if you have 5 rentals your net income won't be that much, you buy another property and six months later sell it, you could make more from the sale than you do from rents....I know, not a great example, but it was quicker....

IMO, it's better to actually itemize what you will be doing by category, buy, sell, trade, lease, rent, manage, finance, repair, renovate, demolish, construct, finance and let contracts to accomplish the same, admit partners and investors, affiliates and contractors, brokers and agents of all kinds as necessary to carry on the business of real estate related activities and to do all things thereafter necessary and lawful to conduct same. (Just off the top of my head people as an example)

Now, look at each of those functions and what might be involved with such aspects and address them in your Operating Agreement or By-Laws. Take "investors" for example, how do you admit them? When does that relationship end? What rights do investors have, do the vote? How will distributions of capital be made between investors and other members or stockholders, officers and directors?

Take care not to be so specific in areas that you become restricted in operations, but address areas in general to show the intent to accomplish other aspects rather than looking like you just operate on a lark, spur of the moment and on tangents. Keep the doors open, but at least hang the doors to a frame work.

I'm not going to compete with Dion for the longest post....LOL, but I'm totally against one property one LLC, that is expensive and totally unnecessary in any state. More to keep up with and it increases the chance of the corporate viel being trashed, you're not just maintaining one or two companies but maybe a dozen...it's a myth to think you are safer. If the viel is perieced in one asset poor LLC liability goes to you personally, from ther it goes to everything you own, including all the interests you have in all of your LLCs! This multiple LLC stuff is for attorneys to clean up messes later. Want protection, do two things, pay attention and get insurance!

I'd guess that in the early 90s, most single family rentals were individually owned, no business entity at all, people managed in complaince with laws, maintained properties so no one fell through the floor, kept hazards away and carried insurance. Your ability to act prudently in your dealings is your first line of defense, insurance is second, if those are sufficient you'll never get in a personal bind.

I too agree with Bill and Dion. One entity per property is ridiculous. In fact, quantity of property has zero to do with it, equity exposure is the important factor. Unless each of your properties is a 100 unit apartment complex, there is no need for that many entities.