Setting up multiple LLCs and Business Credit Cards
Member since 2021 · 14 posts · 3 votes
Setting up multiple LLCs and Business Credit Cards
Most Popular Reply
Real Estate Consultant · Colorado Springs, CO · Member since 2014 · 86 posts · 64 votes
3yTo the original questions @Ponni Carlin and @Brittany Guimond, forgive my long-winded, estate planning/asset protection answer, but here's the answers and hopefully the logic behind the 'why':
We are investors because we are conducting business. If you own different properties, in effect, these are all diff business lines of your overall real estate business. Accordingly, you should have different LLCs for each and every property, and ideally, if you are trying to scale up properly (which it sounds like you're well on your way of doing so) you want to have separate books, accounts, and yes, credit cards for each. "BUT that means diff accounts....lots of admin...etc...etc" Yes, yes it does. This is what all businesses on large scale do.
To the LLC topic, when we set up an LLC it means this: include the State registration, pulling an EIN (optional, but to create a truly separate entity, should be done), put together an Operating Agreement (even if you are the sole member, because again, this is part of business formalities necessary to show in a court that you're intention was to make the LLC separate from you personally); and yes, you should open a separate business bank account for the LLC (because comingling funds in an account under your personal name is the easiest way for a suing attorney to collapse the LLC). If you used a personal loan to acquire the property, I would NEVER, EVER, own a rental property in any individual name/capacity. The properties need to be deeded over (with full Grant Deeds, not Quitclaim Deeds, to provide full rights and full title rights) to the LLC.
To the Due on Sale Clause, "BUT the due on sale clause....etc...etc..." yes, some version of this is found in every modern day mortgage, however, there are documented and regulatory exceptions for transferring title to property and NOT triggering Due on Sale....especially when the purpose of the transfer is to entities for the sake of estate planning/asset protection. You just have to have the knowledge of where this is found and if and when the lender ever finds this (which they don't) then a half page letter citing the exception and a brief explanation covers this. This is not an issue.
To Umbrella Insurance as protection, while you want landlord coverage, as well as an umbrella policy. Please repeat after me: insurance does not protect you from liability...it only pays the litigation costs and damages once you've already been found liable/negligent and have a judgment in your personal name (if you didn't change title on that rental property and a cause of action). That being said, an LLC DOES NOT make the property immune from liability...it does however, limit/contain it to the assets within that same LLC. This is something that is unfortunately vastly misunderstood throughout the real estate investor world. Generally, an umbrella policy covers any excess damages that haven't already been paid by your underlying policies, but those policies need to pay in the first place, and then the umbrella kicks in. I have insurances (landlord and umbrella) in place for my properties, but I know how insurance companies stay profitable (by only paying claims that they absolutely must pay). Keep in mind that these policies are drafted by sophisticated attorneys and drafters and typically have precise language and exclusions. How often do investors actually read through an entire policy and understand the exclusions? I can tell you that attorneys sometimes don't even read them...
It's nice to hear that some out there have been in the game for decades, have all their properties in their personal names, and nothing catastrophic has ever happened to them. Best wishes and glad to hear that at times, but from my professional experience, having these things in place are less of a "personal preference or opinion" it is just using resulting to validate what we believe is the appropriate course. You can ride a bike for 20 years without a helmet and never have an issue, therefore, in your experience a helmet is unnecessary...until that time you hit an unexpected pebble, fly over the handle bars and think...wish I had a helmet on.
41 Replies
- Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes3y
@Ponni Carlin
Step back for a second and I am curious why you have multiple LLC's
Yes business credit is a pull on your personal so it will impact your score.
7e investments53 Reviews - Member since 2021 · 14 posts · 3 votes3y
Hi Chris, my properties are across different states and this was my tax attorney's suggestion. Do you feel otherwise? Thanks!
- Investor · Baton Rouge, LA · Member since 2019 · 184 posts · 167 votes3y
Quote from @Chris Seveney:
@Ponni Carlin
Step back for a second and I am curious why you have multiple LLC's
This seems like the ultimate strategy for asset protection so this is what a lot of CPAs and attorneys will recommend. They fail to mention that you need to be a part-time trained accountant in order to maintain the requirements of legal separation. My CPA told me the same thing. Just make an LLC per property. You'll find a lot of people on BP that do this, and a lot of people that think it's nonsense. There is no right answer. You just need to decide how much time you want to spend maintaining a business vs. having enough insurance to allow you to sleep at night. If you have a significant net worth, by all means get more protections in place. At that point though, I would be hiring someone to handle all of that for me.
To answer your question, Ponni, I would do it all at once. Take the hit once instead of spreading it out over time.
- Virtual Assistant · Remote · Member since 2020 · 93 posts · 45 votes3y
Quote from @Troy P.:
Quote from @Chris Seveney:
@Ponni Carlin
Step back for a second and I am curious why you have multiple LLC's
This seems like the ultimate strategy for asset protection so this is what a lot of CPAs and attorneys will recommend. They fail to mention that you need to be a part-time trained accountant in order to maintain the requirements of legal separation. My CPA told me the same thing. Just make an LLC per property. You'll find a lot of people on BP that do this, and a lot of people that think it's nonsense. There is no right answer. You just need to decide how much time you want to spend maintaining a business vs. having enough insurance to allow you to sleep at night. If you have a significant net worth, by all means get more protections in place. At that point though, I would be hiring someone to handle all of that for me.
To answer your question, Ponni, I would do it all at once. Take the hit once instead of spreading it out over time.
Hello,
Can you elaborate on the bold part? Thanks.
- Member since 2021 · 14 posts · 3 votes3y
@Troy P. thank you so much for your thoughts. I like BP because I get honest responses like this. Now I'm thinking I should have invested all in one state. :) I will review what you said and see how to move forward.
- 3yBenjamin AakerPro MemberRental Property Investor · Brandon, SD · Member since 2015 · 1k+ posts · 1k+ votesLLCs are a good way to limit liability, but they don't remove it. They can help to compartmentalize your investments, so if one has a bad financial outcome, the others can be shielded, provided you follow all the correct steps. My rule of thumb is a new LLC if it is in a different state, has a different ownership structure or business plan, or once the LLC has > $1M in property value. Sure, your accountant will make a bunch of money but I believe it is worth the expense for the protections given.
- 3yBenjamin AakerPro MemberRental Property Investor · Brandon, SD · Member since 2015 · 1k+ posts · 1k+ votesAnd further, you don't need a credit card for each one. You can simply get a debit card from your bank and not have to run your credit. You should have a different bank account for each one, though.
- Investor · Baton Rouge, LA · Member since 2019 · 184 posts · 167 votes3y
Quote from @Rachel Mazzanti:
Quote from @Troy P.:
Quote from @Chris Seveney:
@Ponni Carlin
Step back for a second and I am curious why you have multiple LLC's
This seems like the ultimate strategy for asset protection so this is what a lot of CPAs and attorneys will recommend. They fail to mention that you need to be a part-time trained accountant in order to maintain the requirements of legal separation. My CPA told me the same thing. Just make an LLC per property. You'll find a lot of people on BP that do this, and a lot of people that think it's nonsense. There is no right answer. You just need to decide how much time you want to spend maintaining a business vs. having enough insurance to allow you to sleep at night. If you have a significant net worth, by all means get more protections in place. At that point though, I would be hiring someone to handle all of that for me.
To answer your question, Ponni, I would do it all at once. Take the hit once instead of spreading it out over time.
Hello,
Can you elaborate on the bold part? Thanks.
Sure. That is how I felt after speaking to a CPA and two attorneys, and one recommended an LLC per property. I'm neither a CPA nor an attorney so this is definitely not legal advice, just what I have come to understand. Creating an LLC and paying your Secretary of State does not give you magical legal separation. Your property has to be OWNED by the LLC. This means you have to get business insurance, keep business accounts separate, separate business bookkeeping, and not touch that money for personal reasons unless you do it a very specific way.
If you already own the property personally, you have to transfer/donate/sell it to your LLC. That could trigger a due on sale clause with your current mortgage and the bank could force you into refinancing into a commercial loan with higher rates and shorter term (all I hear is less cash flow). Everyone says they've never heard of this happening, but why knowingly breach a contract??
If you're purchasing a new home, you must do it with some type of commercial loan from the beginning like mentioned above. I hear some people actually purchase in their personal name for better terms then transfer to their LLC after closing. This seems risky becuase you have no clue who will own that note the day after closing and how wiling they will be to allow this donation.
The happy median I've found, and the only way I would use LLCs in the future is with a holding LLC for each property and a single Property Management LLC that runs the business, manages the properties, records income/expenses/debts for all properties, and pays the "owners" of all properties involved. This seems like the simplest way of keeping everything legit in case you end up in a courtroom, but still does not seem very simple at all. How do you pay all of the "owners" of each property? You would still need to maintain a large number of separate books for those entities, as well as annual/quartly meetings, filings, etc. for each entity. The accounting may be easier, but far from simple. That is why I dropped the idea and will leave it up to a professional when/if that day ever comes.
Browse the forums a little more. You'll see lots of veteran investors who do not recommend any LLCs unless you have large multifamily/commercial property or significant net worth. A large sum of insurance has been perfectly fine for investors over the years, and I would love to hear a story where that proved otherwise. - Rental Property Investor · Kalamazoo County, MI · Member since 2021 · 22 posts · 11 votes3y
I personally don't pay cash for anything unless I have to, reaping the rewards offered through credit cards adds up, plus introductory offers etc.
I can't speak to if you should have multiple LLC's etc, but I have opened multiple LLC's for different businesses, and opening too many new accounts all at once can cause a denial simply for too many new accounts.
Does each LLC have an EIN you'll be applying with? If so, that may improve the odds of not being denied, but too many new accounts or too many inquiries will drop your score in one aspect, but in a month or two, the increased credit from new accounts will decrease you percentage of credit used (unless you use too much of those available credits) which increases your credit score.
- Rental Property Investor · Kalamazoo County, MI · Member since 2021 · 22 posts · 11 votes3y
I do have separate checking accounts for each LLC, but I don't uses debit cards - I have checks if credit isn't an option.
- Realtor · New Castle, CO · Member since 2022 · 93 posts · 58 votes3y
What an informative thread this! I own all of my properties in my own name, and have each property financials flow through individual LLC checking/saving accounts. I use 1 credit card for everything (biz + personal), and keep track of all expenses for each property. If I have a property expense, I pay for the expense with my CC and then pay my CC bill out of the property account. I think as long as you have a system in place, you can make anything work, as long as you're not co-mingling funds between properties.
On the separate LLC discussion, my CPA advised me to keep properties in my own name (not LLC) and to consider an umbrella policy with my insurance provider for added liability protection.
- Investor · Baton Rouge, LA · Member since 2019 · 184 posts · 167 votes3y
Quote from @Brittany Guimond:
What an informative thread this! I own all of my properties in my own name, and have each property financials flow through individual LLC checking/saving accounts. I use 1 credit card for everything (biz + personal), and keep track of all expenses for each property. If I have a property expense, I pay for the expense with my CC and then pay my CC bill out of the property account. I think as long as you have a system in place, you can make anything work, as long as you're not co-mingling funds between properties.
On the separate LLC discussion, my CPA advised me to keep properties in my own name (not LLC) and to consider an umbrella policy with my insurance provider for added liability protection.
It sounds like you have an individual Property Management LLC for each property? I'm curious of your reasoning behind this and what advantages it offers.
- 3yJohn MorganPro MemberRental Property Investor · Grand Prairie, TX · Member since 2018 · 2k+ posts · 2k+ votes
I've got one LLC and one biz account for 17 properties. More than half my properties are in my personal name. Just get a million in liability and you'll be fine. Any lawyer can pierce an LLC anyway. They're not bullet proof like some people think.
- Virtual Assistant · Remote · Member since 2020 · 93 posts · 45 votes3y
Quote from @Troy P.:
Quote from @Rachel Mazzanti:
Quote from @Troy P.:
Quote from @Chris Seveney:
@Ponni Carlin
Step back for a second and I am curious why you have multiple LLC's
This seems like the ultimate strategy for asset protection so this is what a lot of CPAs and attorneys will recommend. They fail to mention that you need to be a part-time trained accountant in order to maintain the requirements of legal separation. My CPA told me the same thing. Just make an LLC per property. You'll find a lot of people on BP that do this, and a lot of people that think it's nonsense. There is no right answer. You just need to decide how much time you want to spend maintaining a business vs. having enough insurance to allow you to sleep at night. If you have a significant net worth, by all means get more protections in place. At that point though, I would be hiring someone to handle all of that for me.
To answer your question, Ponni, I would do it all at once. Take the hit once instead of spreading it out over time.
Hello,
Can you elaborate on the bold part? Thanks.
Sure. That is how I felt after speaking to a CPA and two attorneys, and one recommended an LLC per property. I'm neither a CPA nor an attorney so this is definitely not legal advice, just what I have come to understand. Creating an LLC and paying your Secretary of State does not give you magical legal separation. Your property has to be OWNED by the LLC. This means you have to get business insurance, keep business accounts separate, separate business bookkeeping, and not touch that money for personal reasons unless you do it a very specific way.
If you already own the property personally, you have to transfer/donate/sell it to your LLC. That could trigger a due on sale clause with your current mortgage and the bank could force you into refinancing into a commercial loan with higher rates and shorter term (all I hear is less cash flow). Everyone says they've never heard of this happening, but why knowingly breach a contract??
If you're purchasing a new home, you must do it with some type of commercial loan from the beginning like mentioned above. I hear some people actually purchase in their personal name for better terms then transfer to their LLC after closing. This seems risky becuase you have no clue who will own that note the day after closing and how wiling they will be to allow this donation.
The happy median I've found, and the only way I would use LLCs in the future is with a holding LLC for each property and a single Property Management LLC that runs the business, manages the properties, records income/expenses/debts for all properties, and pays the "owners" of all properties involved. This seems like the simplest way of keeping everything legit in case you end up in a courtroom, but still does not seem very simple at all. How do you pay all of the "owners" of each property? You would still need to maintain a large number of separate books for those entities, as well as annual/quartly meetings, filings, etc. for each entity. The accounting may be easier, but far from simple. That is why I dropped the idea and will leave it up to a professional when/if that day ever comes.
Browse the forums a little more. You'll see lots of veteran investors who do not recommend any LLCs unless you have large multifamily/commercial property or significant net worth. A large sum of insurance has been perfectly fine for investors over the years, and I would love to hear a story where that proved otherwise.Thanks. I already knew about that. I thought there was something specific about the part-time trained accountant. I was told that it is best to have 1 LLC per property, but everyone does things a bit different. If you ever need professional help with your finance/bookkeeping let me know. I can refer you to someone who can help.
- Realtor · New Castle, CO · Member since 2022 · 93 posts · 58 votes3y
@Troy P. I set up individual LLCs for each property per the advice of my CPA and managing broker. I also needed individual EIN #s for each property's checking/savings accounts, and this helps keep all expenses straight so I'm not commingling funds.
- Investor · Baton Rouge, LA · Member since 2019 · 184 posts · 167 votes3y
Quote from @Brittany Guimond:
@Troy P. I set up individual LLCs for each property per the advice of my CPA and managing broker. I also needed individual EIN #s for each property's checking/savings accounts, and this helps keep all expenses straight so I'm not commingling funds.
Did you transfer the deed of each property to the LLC? How do you acquire new properties? Commercial loans? My CPA acted completely clueless when I told him I could get a residential loan for an investment property. I really need to find better team members... - Realtor · New Castle, CO · Member since 2022 · 93 posts · 58 votes3y
I left each property in my own name because there is a risk of transferring into the LLC via quit claim deed and the bank could call the note due. I've never heard of it happening to anyone I know IRL but it's too big of a risk for me to take on. All my properties are residential/primary loans, not commercial, because I've been able to live in them or partially own them with another investor who lives in them. You can ABSOLUTELY get a residential loan for an investment property! My CPA owns rental properties himself so he's got that going for him! I'm not sure where he's licensed outside colorado or where you live, but I'm happy to make an intro!
- Member since 2021 · 14 posts · 3 votes3y
@Sara K Chilcote Thank you! I do like the credit cards for those bonus offers. That is one of the reasons I was considering maybe doing one and then waiting to do another one. These all have different EINs.
- Member since 2021 · 14 posts · 3 votes3y
@Brittany Guimond quick question. So you have an LLC for each individual property, but you didn't move the properties in the LLC? Thanks!
- Realtor · New Castle, CO · Member since 2022 · 93 posts · 58 votes3y
@Ponni Carlin correct! If I could do it over again, I would have created the LLCs first, and then wrote offers as the LLC, but we had to act fast when these deals came up so we decided to offer in our personal names. I want to explore opening a single LLC with several DBAs under it and then putting future properties in those DBA names instead, but I need to chat with my CPA about that first — no idea if that's a good strategy, so if anyone has any insight I'd love to hear it!
- Member since 2021 · 14 posts · 3 votes3y
@Brittany Guimond that is very interesting! I didn't think you could do that. I do like the LLCs for clean bookkeeping purposes, but am nervous about transferring the properties because of this due-on-sale clause. Though most of my properties are commercial loans.
- Realtor · New Castle, CO · Member since 2022 · 93 posts · 58 votes3y
@Ponni Carlin ahh, that makes sense since yours are commercial. I don't have any commercial yet. But yes, totally doable to own a rental property in your personal name on a residential loan (if it's a SFR or multi 1-4 unit property).
- Investor · San Antonio, TX · Member since 2017 · 31 posts · 33 votes3y
@Brittany Guimond
So you have an LLC for each property but there's no assets in the LLC? Or did I misunderstand your statement?
- Realtor · New Castle, CO · Member since 2022 · 93 posts · 58 votes3y
@Courtney Walker no real estate assets in the LLC, but I run all the finances through the LLCs. Is this weird? I'm a newbie, so please tell me if I'm doing this wrong 🙈
- Investor · San Antonio, TX · Member since 2017 · 31 posts · 33 votes3y
@Brittany Guimond I’m not an expert but I don’t see the benefit. Someone else may be able to chime in and provide more insight.
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