Structure a business

10 Replies

Hey BP members, I have been researching on how to structure the start of my rental empire. I hear a lot of everything...one LLC for each property...one LLC for all my properties...different tax strategies... My question is what is right? I want to buy rentals, have them protected and able to enjoy tax benefits. Can I get an opinion on the newest structure I’ve listed below: Trust ⬇️ Holding LLC (In LLC frIendly state) ⬇️ LLC 1(Rental 1) (In same state as rental) LLC 2(Rental 2) In same state as rental) LLC 3(Rental 3) In same state as rental) and so on... From my understanding the lower LLCs should have the income flowing to the holding company which controls them all. Could I get some help with this? 🙏

Jose,

What is right depends on your risk tolerance and amount of entities you are willing to handle. The more entities the more paperwork.

1. You want protection: LLCs offer that.

2. You want tax benefits: LLC offer that.

3. What is the purpose of a trust? High CA tax? anything else? Why type of trust?

4. What tax benefits are you looking for?

5. What is your exit strategy?

6. Single Family homes or Multifamily?

7. Are you the only investor?

8. How many properties total you plan on acquiring?

9. Is this your only business? Do you have a job too?

@Jose Pena

There are several considerations that can go into the analysis of whether you need an LLC or whether a large insurance policy will suffice. Will depend on several factors like the type of property, type of tenants, your risk tolerance, other assets you own, your estate planning, laws where the property is located, etc.

Any lawsuits would be limited to the assets of the LLC and not your personal assets (assuming you run the LLC appropriately and the corporate veil is not pierced). But, an LLC will not limit you from liability in total. You can still lose your investment in the LLC. If you're going the umbrella insurance route, make sure it will cover you for several things including just the routine slip and fall (like mold or earthquake). You'll also want to ensure you have a good property manager to look after the upkeep of the property if you are not there to notice anything deteriorating or which may need attention.

Creating an LLC in California would cost you a minimum tax of $800 every year. You would have ongoing filing requirements with the State and would need to keep business records and documentation. Even if you create an LLC in the state where the property is located, California will collect $800 as a "foreign" LLC because you are managing the LLC from CA and therefore "doing business" in CA.

You also want to look at whether a pass-through entity helps your bottom line and your taxes. There is a new 20% pass through deduction you may qualify for that could help you, but not everyone qualifies. 

Also, when you say trust, do you mean a living trust/family trust, or do you mean a more specialized trust?  Having an estate plan is very important, and in CA having a trust is almost essential to avoid probate but your typical family trust does not provide liability protection.

These are all things you will want to discuss with your attorney and CPA. If you need references for either of them in San Diego, let me know.

*This post does not create an attorney-client or CPA-Client relationship.The information contained in this post is not to be relied upon.Readers should seek professional advice.

@Katie Lepore I need references!!! There is a lot more to this that I need to sort out. Know anyone in San Diego who specializes in this area?
@Hector Bilbao I need some help setting this stuff up, I just want to start with SFH rentals. I want to structure so the foundation can support any amount I put on it. I want to be able to keep acquiring properties as I get closer to retirement and make sure I’m protected. I want to be able to pass on my wealth to my chIldren.
@Hector Bilbao Well I don’t plan on staying small or slowing down. Think big be big. If I can structure things the right way now to keep scaling for a few extra bucks then I want to be able to make sure I’m set. Shifting assests now would be cheaper than shifting later. Thanks for the advice Hector
@Jose Pena it sounds like you need to call @Katie Lepore . Pay for advice from attorneys and CPAs, it will be worth it. The problem I have with LLCs for STR or SFH rentals is the $800 annual fee in CA and your ability to obtain financing. Have you talked to lenders and are they willing to loan to your LLC vs. you as an individual or your trust?
@Nick Foster I have a sole proprietorship that I use for funding. I want to avoid the $800 annual fee. I am taking her advice and paying for some help. I want to get this right. Thanks Nick

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