Minnesota Series LLC vs Holding Company

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Minnesota Series LLC vs Holding Company

Benjamin Barnard
Hopkins, MN · Member since 2017 · 3 posts · 0 votes

I'm just starting to get behind the idea of investing in buy and hold real estate in MN and I am looking to form an LLC. As I want to structure it in a way that allows for easy growth, I'm looking at either a Series LLC or having individual LLCs with a holding company above. Ultimately, I'm looking for the safest vehicle for my properties.

It looks like Minnesota does have a Series LLC but my understanding is that it does not offer the same protections as a holding company would provide. Although it is a few years old, this article from 2015 (http://www.fortenberrylaw.com/states-series-llc-acts-recognize-series-llcs/) says the limited liability of a series is not recognized. In another article, (https://www.dunncarney.com/2007/06/layering-limited-liability-companies-does-it-enhance-the-liability-shield/) it seems to confirm the same but was structured in a way that I could not tell if that was only in the case of wrongful conduct.

If any of my information seems to be incorrect or misinformed let me know so I can correct my understanding. If there is other information that is needed let me know and I will provide it to the best of my ability.

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John Woodrich
Flipper/Rehabber · Minneapolis, MN · Member since 2016 · 1k+ posts · 1k+ votes
9y

I agree with many comments on here. I haven't come across a case where a renal property took someone down but the cost of setting up an LLC is negligible when you consider the cost of purchasing real estate. In most cases we help set them up for $300-$350 which includes the MN SOS fee, Fed ID number, and a little consulting time. If you do it yourself the sate filing fee is only $155. Many people look at it as a cheap insurance policy whether it works or not. An umbrella policy may be best if you have multiple properties. It is an added cost but it will be partially offset by the reduction in individual policy rates.

@Tim Swierczek many would argue that if you have more equity you have more to lose with a property. In that instance you should probably have more insurance or setup stronger liability protection as you have more to lose than someone who has little skin in the game. Also holding all of your properties in the same LLC puts all of them at risk if you have a problem with one of them... Simply setting up a parent company with subsidiary LLCs could provide some additional protection and allow you to send the bank the same financials they are used to seeing. If you setup the parent/sub structure and commingle funds between entities it may question whether you have actual liability protection but in a lawsuit I would rather say that the LLC only owned one property than have to give them a list of assets containing many others. I say this from an advisor standpoint - I currently do not have all of my properties in LLCs. But I also don't have insurance on all of my houses as well.

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  • Dale Lotts
    Rental Property Investor · Lakewood, OH · Member since 2016 · 73 posts · 32 votes
    9y

    I'm just curious, can anyone show me any news stories or legal cases where a landlord holding property in his own name actually lost the case in a way where LLC would have prevented the loss?

    It seems there is a lot of concern about protecting property with an LLC or corporation but I can't find counter examples that prove it is beneficial. Where should I be looking?

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  • Tom Wolf
    Real Estate Agent · Bloomington, MN · Member since 2017 · 6 posts · 2 votes
    9y

    Dale, the LLC will not affect whether or not you may lose a case. It is in place to protect your assets in the event that you do lose a case. If you are holding Rental property in your own name and you have a legal settlement against you personally you could lose your Rental property. Likewise if there a case brought forth by a tenant they could go after your personal assets, i.e. your home, savings, etc.

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  • Tim SwierczekPro Member
    Lender · White Bear Township, MN · Member since 2016 · 1k+ posts · 1k+ votes
    9y

    @Benjamin Barnard @Dale Lotts has a very good point that I too have been considering. I hold all my properties in 1 LLC, and that creates some separation. However, in the end, you must have a lot to lose to really have the need to have each property in a separate LLC. There are increased costs and many of your traditional lending sources and insurance options become limited when you have an LLC for each property. For example, my average duplex insurance cost in my portfolio in a 4 property bundled policy is $1200/yr, but individually they would be $1800/yr. I also benefit from better banking terms as they underwrite to the whole portfolio, which recently has gotten me a 5% reduction in down payment. That single difference is attributed by my banker from the 7-year performance history of my portfolio with equity and reserves in the 1 LLC, those numbers would be diluted if I had new LLCs for each property.

    In addition, you lose the corporate protection if you improperly manage the funds, which becomes harder to separate if you have multiple properties unless you get multiple bank accounts, which also probably means multiple credits or debit cards for repairs, etc, or a separate management company with an agreement.

    I'm certainly not saying that there is no legal protection to multiple LLCs but I think you need to ask what is the cost to you protect yourself from the boogie man?  

    My .02 is if you have enough properties with equity and great cash flow use some of it to get real legal advice from an attorney licensed in MN, if you do not set up one LLC and start building a portfolio that is worth protecting and worrying about.

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  • Dale Lotts
    Rental Property Investor · Lakewood, OH · Member since 2016 · 73 posts · 32 votes
    9y

    @Tom Wolf yeah, I understand the theory about the provided protection. My question is about data where a landlord actually (not in theory) lost a case that resulted in the loss of other properties and/or personal property & finances. Additionally, some analysis that shows that in this actual case the landlord would likely have been protected by an LLC.

    LIke @Tim Swierczek said, there is a cost to all of this LLC stuff. I don't have an LCC and I doubt I ever will. I think there easier and less expensive ways to protect real estate using existing lien laws.

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  • Tim SwierczekPro Member
    Lender · White Bear Township, MN · Member since 2016 · 1k+ posts · 1k+ votes
    9y

    @Dale Lotts & @Tom Wolf a good umbrella policy handles the majority of the liability issues.

    1Reply
  • Dale Lotts
    Rental Property Investor · Lakewood, OH · Member since 2016 · 73 posts · 32 votes
    9y

    @Tim Swierczek Agreed!

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  • John Woodrich
    Flipper/Rehabber · Minneapolis, MN · Member since 2016 · 1k+ posts · 1k+ votes
    9y

    I agree with many comments on here. I haven't come across a case where a renal property took someone down but the cost of setting up an LLC is negligible when you consider the cost of purchasing real estate. In most cases we help set them up for $300-$350 which includes the MN SOS fee, Fed ID number, and a little consulting time. If you do it yourself the sate filing fee is only $155. Many people look at it as a cheap insurance policy whether it works or not. An umbrella policy may be best if you have multiple properties. It is an added cost but it will be partially offset by the reduction in individual policy rates.

    @Tim Swierczek many would argue that if you have more equity you have more to lose with a property. In that instance you should probably have more insurance or setup stronger liability protection as you have more to lose than someone who has little skin in the game. Also holding all of your properties in the same LLC puts all of them at risk if you have a problem with one of them... Simply setting up a parent company with subsidiary LLCs could provide some additional protection and allow you to send the bank the same financials they are used to seeing. If you setup the parent/sub structure and commingle funds between entities it may question whether you have actual liability protection but in a lawsuit I would rather say that the LLC only owned one property than have to give them a list of assets containing many others. I say this from an advisor standpoint - I currently do not have all of my properties in LLCs. But I also don't have insurance on all of my houses as well.

    2Reply
  • Benjamin Barnard
    OP
    Hopkins, MN · Member since 2017 · 3 posts · 0 votes
    9y

    Thanks for taking the time to reply  @John Woodrich @Tom Wolf @Tim Swierczek @Dale Lotts. I think I'll probably set up a single LLC to handle my assets at least in part to my general paranoia of separation of business and personal assets. As of now, that seems to be the best fit for me.

    Thanks again for the responses.

    0Reply
  • Mike MoeBusiness Member
    Realtor · Minneapolis, MN · Member since 2017 · 79 posts · 52 votes
    9y
    Benjamin Barnard take a listen to BP podcast #109. Its got a lot of great info on this subject. The one suggestion that I took away and will be looking into is to have two LLCs. A holding company, and an operating company. That way the entity that holds the property is not at risk because it isn't involved in the day to day, and if the operating LLC has a judgment against it, they cannot come after the properties. Does anyone have any experience with this structure?
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  • John Woodrich
    Flipper/Rehabber · Minneapolis, MN · Member since 2016 · 1k+ posts · 1k+ votes
    9y

    @Mike Moe I haven't seen the podcast but I presume the operating LLC is doing the leasing and is paid a management fee. The strategy probably revolves around the operating company taking on any leasing liability so someone would sue the leasing company, that doesn't have any assets, and therefor protect the holding company with the real estate. Let me know if I am incorrect.

    I am not an attorney but I don't totally buy the fact that the leasing company will not take down the operating company.  At the same time if the operating company is providing services one may argue that the income of the operating company is subject to self-employment taxes....  On BP some people may look at this as an opportunity to sock away money into a Solo 401-k or SDIRA but IMO this is not a good plan.  Depending on individual circumstances self-employment taxes would br roughly 12.2% above and beyond ordinary income taxes... 

    I will disclaim that I haven't seen the podcast but that strategy may be worth trying for a larger company who can absorb more administrative costs (solid operating agreements drafted by attorneys, separate accounting, separate checkbooks, etc) but for most people on here the costs likely outweigh the (potential) benefits.

    Feel free to reach out to me if my thoughts are off base or if you have any questions.

    0Reply
  • Benjamin Barnard
    OP
    Hopkins, MN · Member since 2017 · 3 posts · 0 votes
    9y

    @Mike Moe I listened to the podcast and he gave a few interesting and creative ideas for entities. What I really got out of it was the podcast was to consult an attorney, CPA, and insurance agent to find the best solution for each individual situation. Thanks for recommending that podcast episode. My original question had come from listening to the Morris Invest channel and specifically this video on Using the Money In Your LLCs' Bank Accounts where they talk about their structure a bit.

    0Reply
  • Jennifer Rysdam
    Rental Property Investor · Cleveland, MN · Member since 2017 · 518 posts · 354 votes
    9y

    Lots of great information here. Thanks everyone. I always notice that it seems like when people sue, they'll sue you and everyone else they can think of, including your Grandma! I only own 2 properties and have one under an LLC. We do the best we can, but in the end we are at the mercy of lots of crazy people who will sue whoever they can for whatever they can, and judges that don't always make reasonable decisions.

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