Rental Property Investor · Berkeley, CA · Member since 2018 · 59 posts · 36 votes
Hi All,
I want to create an LLC structure for various investment and property holdings. I already have a couple of properties in different states, and I'm also wanting to participate in syndications and other ventures. How have you structured your businesses both from an asset protection and organizational model? And yes, to be discussed further with a lawyer, but even lawyers can have different recommendations.
Currently, I'm thinking one model such as:
- Manager managed LLC holding company
- Member managed LLC per property or portfolio of properties (I know this depends on the investor and their risk tolerance, property type, etc)
- Member managed LLC for syndication deals, etc. Perhaps this should be siloed further per deal? Or does it make more sense to just use the holding company for these types of deals?
Accountant · La Mesa, CA · Member since 2017 · 477 posts · 476 votes
8y
Either there is a misunderstanding or the people offering you advice do not understand California tax laws.
Whether an LLC is manager or member managed does not affect whether it is a disregarded entity or not. What controls that is the number of members (owners). If it is a single member LLC, by default it is a disregarded entity in which case it does not file for federal purposes, only state.
California does not care if the LLC is disregarded or not for federal purposes. Either way you will be paying the $800 tax if you are considered to be doing business in California.
Also, it does not matter what state the LLC is formed under if California discovers it and determines that it is doing business in California. The state has determined that if the managing member (including a single member LLC that is managing another LLC) is a California resident, then the LLC is doing business in California.
I hope this helps. I don’t want you to have unexpected tax bills.
Rental Property Investor · Glen Rock, NJ · Member since 2015 · 3k+ posts · 2k+ votes
8y
@Jonathan James Look Your structure sounds good in general, but ideally you'd want to run it by RE attorney from legal perspective and then by a CPA from a tax perspective. If you have one who is a CPA and attorney that'd be ideal. One such guy I think lives on West Coast, his name is Mark Kohler. I don't know him personally but I do get his newsletter.
Unless you are having different partners for each deal, I don't know if you necessarily want a different LLC for every investment. As you may know, California considers you doing business in California if the manager (you it seems like) resides in California. Therefore, you would be paying a minimum of $800 per LLC per year, regardless of what state you actually set the LLC up in. You would also, presumably, be paying a CPA to prepare the tax returns for you.
Of course, there are a lot of times where it makes sense to have a number of LLCs. It makes sense to set up a different LLC for every state you are investing in just to keep things cleaner. This isn't necessary, but I think there are advantages to it. You would want to discuss that with an attorney as well.
It probably makes sense to have different asset classes in different LLCs. For example, it would probably make sense to have a commercial property in a different LLC than a residential property.
It is necessary to create different LLCs if you have different partners on each deal.
For syndication deals, the typical structure I see is a general partner set up as an LLC, and the investment itself set up as a limited partnership. I think this makes a lot of sense, particularly since you would want the investors to be precluded from participating in management activities.
Rental Property Investor · Berkeley, CA · Member since 2018 · 59 posts · 36 votes
8y
@Brian Schmelzlen - Thanks for adding your input/insights. I have had it suggested to me from a couple legal sources that one strategy for those living in CA is to create a LLC structure similar to the above. In that way, the member managed LLCs are considered disregarded entities, and so I would only need to file 1 (I believe, Federal) tax return. I do believe I would have per LLC state tax filings, however.
The rest of what you stated sounds like good advice nonetheless.
Accountant · La Mesa, CA · Member since 2017 · 477 posts · 476 votes
8y
Either there is a misunderstanding or the people offering you advice do not understand California tax laws.
Whether an LLC is manager or member managed does not affect whether it is a disregarded entity or not. What controls that is the number of members (owners). If it is a single member LLC, by default it is a disregarded entity in which case it does not file for federal purposes, only state.
California does not care if the LLC is disregarded or not for federal purposes. Either way you will be paying the $800 tax if you are considered to be doing business in California.
Also, it does not matter what state the LLC is formed under if California discovers it and determines that it is doing business in California. The state has determined that if the managing member (including a single member LLC that is managing another LLC) is a California resident, then the LLC is doing business in California.
I hope this helps. I don’t want you to have unexpected tax bills.
Rental Property Investor · Berkeley, CA · Member since 2018 · 59 posts · 36 votes
8y
@Brian Schmelzlen I'll look into this more, since your position seems to conflict from the two other legal sources which I've consulted. I indeed don't want unexpected tax bills or a surprise with penalties/etc down the road....
Rental Property Investor · Washington, DC · Member since 2018 · 198 posts · 169 votes
8y
Hey @Jonathan James Look, talk to your lawyer and CPA about creating a "series LLC." If you went with that structure, you'd be paying fees the same as you would for a single LLC, but you can set up as many series you want below that umbrella, which can all be treated individually, so long as they follow proper procedures and have separate bank accounts. Under this structure, you'd put each property in it's own series and accomplish the goal of limiting debts and liability to each individual piece of real estate.
I created an LLC recently and plan to put several properties in it, but once I learned of the series LLC i decided the next entity I create will definitely follow this structure, as it provides maximum flexibility and liability protection at the same cost of creating a single LLC.
Rental Property Investor · Washington, DC · Member since 2018 · 198 posts · 169 votes
8y
@Katie L., thanks for correcting me on that. They are a popular option in the DC area, but I was not aware there were restrictions on them at the state level. Definitely good information to know.
Rental Property Investor · Berkeley, CA · Member since 2018 · 59 posts · 36 votes
8y
I'm going to have a consultation with another legal group who do both taxes and legal work. Call is scheduled for next week. FYI, both consultations I've had so far are from well known entities mentioned on these forums.
Regarding the advice given so far, do y'all live and invest in California and invest in real estate out of state?
Rental Property Investor · Berkeley, CA · Member since 2018 · 59 posts · 36 votes
8y
Just wanted to close the loop on this thread that I did seek my 3rd consultation with a lawyer and received the same advice from my previous consultations. Keeping everyone's advice in mind, I have made up my mind on what entity structure I will pursue given the information I have and the businesses I plan to operate.