Setting up multiple LLCs and Business Credit Cards
Member since 2021 · 14 posts · 3 votes
Setting up multiple LLCs and Business Credit Cards
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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
- Realtor · New Castle, CO · Member since 2022 · 93 posts · 58 votes3y
@Courtney Walker benefit for us is liability protection with our tenants. Since every payment flows through the LLC, if they ever came after us, they wouldn't be able to come after our personal or other biz assets. And if it ever came down to going after the property in question, my CPA tells me the umbrella insurance policy we have should protect us 🤷🏼♀️
- Investor · Baton Rouge, LA · Member since 2019 · 184 posts · 167 votes3y
Quote from @Brittany Guimond:
@Courtney Walker benefit for us is liability protection with our tenants. Since every payment flows through the LLC, if they ever came after us, they wouldn't be able to come after our personal or other biz assets. And if it ever came down to going after the property in question, my CPA tells me the umbrella insurance policy we have should protect us 🤷🏼♀️
I'm sorry, but I believe you misunderstood at some point. If you own the property personally, then YOU are liable for any claims against the property. Running your funds through an LLC is nothing more than a Property Management LLC. You are correct that other business assets may be somewhat shielded, but your personal assets are not shielded from a tenant living on your property. The only thing protecting you at this point is the umbrella insurance, not the LLC. If you have an LLC per property, then you have a separate PM company per property. It may be nice for accounting, but offers no protection.
- 3yDrew SygitBusiness MemberProperty Manager · Royal Oak, MI · Member since 2012 · 12k+ posts · 9k+ votes
@Brittany Guimond no idea why you wouldn't have a business credit card to COMPLETELY separate your peronsal and business expenses.
How likely do you think an IRS auditor will ask for all your personal credit card and bank account statements to test that you haven't reimbursed anything you shouldn't have? Even if they find nothing, the hours you'll spend meeting their requests will be significant:(
Logical Property Management4.9451 Reviews - Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes3y
Quote from @John Morgan:
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.
Same here and I agree. Dozens of rentals over 21 years.
I have LLCs own commercial assets only, from day 1.
I have 1 central management entity I run everything through.
Transferring resi property from your name with a lame QCD shows up in your title chain (no anonymity) and heightens risks you are trying to avoid.
You may then be without title and or hazard insurance. Your mortgage DOS clause may trigger. Double genius!
- Rental Property Investor · IL · Member since 2021 · 12 posts · 7 votes3y
@Steve Vaughan
Question for all in this forum as I want to hear your thoughts.
I currently own 1 rental- it was originally a residential on personal name, we moved out and put in for rent. I do plan to keep as rental property as long as I can. My CPA advises to transfer the property in an LLC which I have been thinking of as well.
My first question is- I want to add another property as second home for STR probably out of state in FL, I have read and heard that with second home financing you only need to put 10-15% down payment.
If I do purchase second property as Vacation home, does this mean I cannot put this property in to existing LLC with my first rental property?
Or vacation rentals can not be put in an LLC, since it's a second home financed property?
Also second question-
when you open an LLC for rental property, does the credit card account needs to opened on personal name or can you open credit card on the LLC name? I have also watched videos that explains the difference between building personal credit and business credit for your LLC.
They were referring to the DUN & Bradstreet bureau and how to build your business credit?? I want to know if this applies to Rental properties LLC's as well??
- Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes3y
Quote from @Sumit B.:
@Steve Vaughan
I currently own 1 rental- it was originally a residential on personal name, we moved out and put in for rent.
My CPA advises to transfer the property in an LLC
What type? SMLLC? MMLLC?
Why? For what purpose exactly?
Ask them how they handle a weak title chain, title insurance and hazard insurance and mortgage DOS risk.
How many rentals do they own? Do they own small residential property inside LLCs? With mortgages?
Did they say anything about the 121 tax gain on sale tax exclusion if you sell within 3 years?Just saying your CPA said doesn't mean squat.
- Realtor · New Castle, CO · Member since 2022 · 93 posts · 58 votes3y
Getting back to the original question in this post, would you recommend having a biz credit card for each property, 1 biz credit card for all properties, or no biz credit card at all? @Drew Sygit @Troy P. @Steve Vaughan @Ponni Carlin
- Investor · Baton Rouge, LA · Member since 2019 · 184 posts · 167 votes3y
Quote from @Brittany Guimond:
Getting back to the original question in this post, would you recommend having a biz credit card for each property, 1 biz credit card for all properties, or no biz credit card at all? @Drew Sygit @Troy P. @Steve Vaughan @Ponni Carlin
I would have a biz credit card per LLC. That LLC, regardless of who/what actually owns the properties in question, could encompass 1 property or it could encompass 20. This is not legal or tax advice, but the general rule is do not commingle funds, whether that is personal/business or business/business. Who is responsible for expenses in your situation? The homeowner or the landlord? Is the LLC the landlord on your lease or are you? To answer your question, I would give each LLC its own business CC if you're looking to build credit. Then, you must pay each of those CCs with the respective bank accounts for that business. This seems like an accounting nightmare for me personally, but that is what I would do given your situation. - Investor · Baton Rouge, LA · Member since 2019 · 184 posts · 167 votes3y
Quote from @Sumit B.:
@Steve Vaughan
Question for all in this forum as I want to hear your thoughts.
I currently own 1 rental- it was originally a residential on personal name, we moved out and put in for rent. I do plan to keep as rental property as long as I can. My CPA advises to transfer the property in an LLC which I have been thinking of as well.
My first question is- I want to add another property as second home for STR probably out of state in FL, I have read and heard that with second home financing you only need to put 10-15% down payment.
If I do purchase second property as Vacation home, does this mean I cannot put this property in to existing LLC with my first rental property?
Or vacation rentals can not be put in an LLC, since it's a second home financed property?
Also second question-
when you open an LLC for rental property, does the credit card account needs to opened on personal name or can you open credit card on the LLC name? I have also watched videos that explains the difference between building personal credit and business credit for your LLC.
They were referring to the DUN & Bradstreet bureau and how to build your business credit?? I want to know if this applies to Rental properties LLC's as well??
I believe there are many vacation homes that are purchased under LLCs. But, you would have to go through the process of getting a commercial loan since you are purchasing as a business which would usually require a stronger down payment and less favorable terms. If I wanted to build credit for my business, then I would open a CC under that business name. - Rental Property Investor · Raleigh, NC · Member since 2016 · 393 posts · 995 votes3y
Quote from @Brittany Guimond:
@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 🙈
If your LLC doesn't own the property, then the LLC isn't actually doing anything and isn't protecting you. If something were to happen (a tenant injures themselves on your property) they would sue the owner of the property which in this case is you personally.
If you are going to have an LLC, then everything needs to be in the LLC name, and none of it in your name. The deed, bank account, and lease agreement should all be in the LLC name and nowhere should it have your personal name. All expenses should be paid out of the LLC bank account and never with your personal bank account or personal credit card.
While it's true the umbrella policy would still cover you, it does mean that you are paying for LLC's that are literally doing nothing.
An LLC provides protection because it is considered an entirely separate legal entity from yourself. When you start mixing and matching your personal name and the LLC then there is no longer any distinct separation and a court will treat them as the same entity which means if sued they can come after everything. - Accountant · Mobile Al · Member since 2019 · 33 posts · 20 votes3y
@Ponni Carlin
I’m a bookkeeper and this is a common practice. Makes for cleaner books for sure.
- 3yDrew SygitBusiness MemberProperty Manager · Royal Oak, MI · Member since 2012 · 12k+ posts · 9k+ votesLogical Property Management4.9451 Reviews
- Accountant · Houston, TX · Member since 2021 · 54 posts · 35 votes3y
There is a lot of information on this page, some I agree with, and a lot I don't. Regardless, your question about CC, I think it depends on you. If you are planning on growing significantly then I would get everything as clean as possible in the beginning even though it may cost more. In the long run, it will help you. If you plan on staying small then having 1 CC with multiple properties would be more cost-effective. When it comes to the bookkeeping/Accountant/CPA side that will look a bit different for each. You're going to pay more for a clean-up if you have 1 CC for multiple properties and don't keep good records. If you're able to keep good records then again, this is more cost-effective. A CC for each property would be a lot cleaner but it will cost more. If these are LTR with more reoccurring transactions then it won't be bad. If these are STR or Flips I would highly recommend the different CCs for properties. The more LLCs obviously the more money towards your CPA but more protection. If you have a holding company LLC, property management company LLC and then LLC per property or at least 2-3 per LLC you'll be in good hands. I love BP as well because of the honesty. Just remember what works for someone might not work for someone else. We all have different methods of what we believe is right. Good Luck :)
- Real Estate Consultant · Colorado Springs, CO · Member since 2014 · 86 posts · 64 votes3y
To 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.
- Realtor · New Castle, CO · Member since 2022 · 93 posts · 58 votes3y
@Luis Alvarez!! Your response here is thoughtful, professional and educated. Thank you for taking the time to relay this information. I'll be reaching out.
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