Managing multiple LLC's

11 Replies

Not sure if this is the right category to post in, but I have a general question about managing multiple LLC's for rental properties. If you hold rental properties in individual/separate LLC's for privacy & protection purposes, what's the best way to handle income & expenses for each? Is it recommended to have a separate bank account in the name of each LLC? Or could you setup another LLC as a management company and run everything through that?

Also I'm a bit unsure how to handle the initial investment in the case of an LLC being formed to purchase property and then subsequently build a new property that will be used as short term/vacation rental. Obviously, the LLC owns nothing at first, so money has to come from somewhere. We are paying cash to purchase property initially, getting a loan to build, and then spending funds to furnish the new properties. This money has to come from somewhere. Do we just record it in the operating agreement as the initial capital contribution from each member?

Hello Dave,

I was wondering if you ever received much help on this topic because I was searching the forums for the same type of advice. Specifically on how to manage 2 separate LLC's. Do we need separate bank accounts, credit cards, etc for each LLC? Or could you have a holding company like you mentioned? Most expenses are specific to each individual property, but there are some general expenses like office supplies or educational material that would apply to both companies. Not to mention it would be a lot easier for accounting purposes to have all cash inflow and outflow through one entity.

Tom,

@David Dachtera  has a speaker from 9am-5pm this Saturday (9/24) in Downers Grove that's covering building business entity structures for tax davantages, liability protect and estate planning.

If you PM him, he can send you the link for registration ($50 though).   I signed up since I'm a newcomer to this field as well.

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I would recommend against multiple LLC's. They become very difficult to manage and keep as separate entities. As soon as you co-mingle funds or otherwise make a mistake and don't keep them separate you have lost the protection they provide. A single LLC give you the protection you need and is manageable. Unless you are dealing with large commercial properties I don't feel you need to separate the properties into different entities.

No legal advice, good luck!

@Tom Chelman ,

Yes - there's still time to register for the weekend event with our tax and legal expert. Connect with me, and I can send you the info on how to register yourself.

In a nutshell to answer your questions, yes - you'll want to keep separate books for each business entity, including separate bank accounts. That just how businesses are run: as distinct, separate entities.

As a business person, you need to get rid of the consumer "cut corners to avoid spending" mindset and embrace the entrepreneur's "cost of doing business" mindset. Most business expenses are deductible from taxable income.

Remember: 

As a W2, you make money, the government takes its cut, your employer deducts benefits, etc. and you get what's left, if anything, to pay your expenses.

A business makes money, pays its expenses, and pays tax on what's left, if anything.

Thank you @David Dachtera your response was very helpful, especially the comment about mindset.

I spoke to a couple other people in a similar situation as mine, and it seems they typically create a S-Corp as a holding / property management company, and then hold each individual rental property in a separate LLC (one LLC for each property). I'm not sure I want to go to all that trouble. :) I think I'd rather just have one LLC for the three properties we will have.

Would you mind commenting on the last paragraph of my original post (pasted below)? Specifically, the last couple sentences.  Thank you!

Also I'm a bit unsure how to handle the initial investment in the case of an LLC being formed to purchase property and then subsequently build a new property that will be used as short term/vacation rental. Obviously, the LLC owns nothing at first, so money has to come from somewhere. We are paying cash to purchase property initially, getting a loan to build, and then spending funds to furnish the new properties. This money has to come from somewhere. Do we just record it in the operating agreement as the initial capital contribution from each member?

@Dave M. ,

First, hold as much value in a single LLC as you feel comfortable with. That's the reason for multiple entities: If you lose one to litigation, how much value is at stake?

You may need input from a suitably savvy CPA on those statements. Initially, there need not be any large investment just to establish the entity. You then go out and engage the deal in which your investors' money will be placed. They invest in your entity and it looks like the entity is paying all cash (no lenders, just investors).

If you're going to buy, tear down and then build something new, obviously the acquisition must take that into account such that you're buying the land for its value and effectively ignoring any structure(s) on it. Otherwise, you'd be paying twice: once to buy something you tear down, and again to build a replacement structure. If that's not what you're asking, consult your financial professional (I'm not one.).

My advice would be to always have separate LLCs for separate rental properties. The partnership structure allows you a great deal of flexibility and while the number of tax filings goes up the record keeping and administrative burden remains the same. You still need to keep track of income/expenses on a per property basis even if you have 10 properties in one partnership.

In the similar fashion you track the initial seed capital contribution you should be tracking subsequent contributions needed to fund the construction etc. You should have individual bank accounts for each LLC and that will simplify the record keeping process. You can just track capital inflows and outflows off the bank statement to properly account for the annual activity.

The last point I will touch on is the management company concept. Management companies are something that often become a necessity as the real estate business scales up. A separate management entity is advisable and can be structured as an s-corp as it does not hold any capital assets. With some advanced planning, management fees (expenses on the rental property) and management income (income on the management company) can effectively manage the character of income (passive vs ordinary) and minimize your tax bill. 

Can i squeeze a sort of related question in here ?

I hold a business under a S Corp and I own just 1 rental property in my name

Can I put the rental under the S Corp also or do I need to open a separate LLC ?

I would generally advise against holding real estate in s-corps. Tax implications are mostly negative as it pertains to real estate and s-corps. So a separate LLC would be my advice.

The purpose of an LLC is limited liability. That means that a creditor can only pursue your interest in the LLC and nothing else. The more that's under the LLC, the more the creditor can reach. So that argues in favor of one LLC per property.

If you co-mingle funds between yourself and the LLC or between LLCs, you are ignoring the corporate separateness of the LLC and providing grounds for a creditor to "pierce the corporate veil" - a fancy way of saying that they can ignore the LLC, too, and reach the commingled assets as well.

So, if you are going to bother having an LLC, it's critical to observe the property formalities, like separate bank accounts and hiring bookkeepers and accountants to keep your books and tax records in good order.

Presumably, you are in this business to build long-term wealth. At some point, your real estate holdings are going to be the biggest asset you own -- bigger than your personal residence, car, etc. If you are so worried about protecting your wealth that you are going to form an LLC, it makes absolutely no sense to undermine your own efforts by putting all of your biggest assets into the same LLC. If Properties A, B, C, and D are owned by the same LLC, then a creditor against Property A can also reach Properties B, C, D. So it's best to keep them separate.

By the way, the cost of preparation of tax returns and financials is not going to be driven by how many LLCs you have but rather by how complex your holdings are. If you have a lot of properties and they are all held under one LLC and everything is commingled, it could take your accountants a lot of effort to sort through your books and records, driving up the fees. If you have small properties each in its own LLC, these are not very complex assets and will not eat up a lot of fees to report.

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