Strategies for paying yourself from a Series LLC

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Strategies for paying yourself from a Series LLC

Max Malec
Rental Property Investor · Dallas, TX · Member since 2018 · 6 posts · 1 vote

Hi BP, 

I am finishing up my second deal and my first deal as a serious investor. I purchased the house in cash and paid for the renovations out of pocket. At the direction of my CPA and attorney, I then created a single member Series LLC including one Master (umbrella) LLC holding a checking account but no other assets, and one sub-LLC owning the house and two bank accounts - 1) an Operating account in which the rent is collected and maintenance/property management fees are paid and 2) a Tax account that collects a monthly deposit from the Operating account to hold and pay for all taxes.

I plan to purchase other properties and create a new sub-series LLC under the Master LLC for each property.

My question is: how do I pay myself the net income from the rents into my personal account? Am I able to set up a recurring monthly transfer from the sub-LLC Operating account to my personal bank account as a type of salary? Should I pass the income from the sub-LLC into the Master LLC before paying it to myself (this may make sense once I have several LLC's all collecting rent so that my personal income would all come from one source)? If I have unspent money in the operating account quarterly/annually, can I pay that to myself as a bonus?

If anyone has experience paying yourself income from a single member LLC (ideally a Series LLC), I would be eager to hear your experience with best practices and things to avoid.

I am in the DFW area in Texas and I understand Series LLCs are not legal in every state and laws may differ, I am just interested in hearing how people pay themselves from their LLC. Thank you in advance!

Best, 

Max

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Christopher Brainard
Rental Property Investor · Rockwall, TX · Member since 2015 · 891 posts · 701 votes
7y

@Max Malec

You should consult the CPA/Attorney that set this up for you :) 

With that being said, if you formed a single member LLC, its likely that the master LLC entity was setup as a disregarded entity with the IRS (IE: has a single IEN, doesn't file its own return, and appears on your Schedule C and/or E). This is how we used to have things setup. The physical location of the money is pretty irrelevant to the IRS, you owe taxes on the rental income as it comes in and on any sale of the assets that you make, just as if it were in your own name.

Alternatively, I have a friend that gets a new EIN for every property and files every tax return separately, but (to me) this defeats the purpose of having a Series LLC and becomes very costly at tax time.

If you want to have W2 income and have a bonus (ie: dividend) to lower your SE Tax liability, you need to look into S Corp taxation. This could potentially lower your overall tax liability, but may make things slightly more complicated from an administrative perspective. 

-Christopher

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  • Christopher Brainard
    Rental Property Investor · Rockwall, TX · Member since 2015 · 891 posts · 701 votes
    7y

    @Max Malec

    You should consult the CPA/Attorney that set this up for you :) 

    With that being said, if you formed a single member LLC, its likely that the master LLC entity was setup as a disregarded entity with the IRS (IE: has a single IEN, doesn't file its own return, and appears on your Schedule C and/or E). This is how we used to have things setup. The physical location of the money is pretty irrelevant to the IRS, you owe taxes on the rental income as it comes in and on any sale of the assets that you make, just as if it were in your own name.

    Alternatively, I have a friend that gets a new EIN for every property and files every tax return separately, but (to me) this defeats the purpose of having a Series LLC and becomes very costly at tax time.

    If you want to have W2 income and have a bonus (ie: dividend) to lower your SE Tax liability, you need to look into S Corp taxation. This could potentially lower your overall tax liability, but may make things slightly more complicated from an administrative perspective. 

    -Christopher

    2Reply
  • Mary M.
    Rental Property Investor · Portland OR · Member since 2018 · 2k+ posts · 3k+ votes
    7y

    Agree discuss with your CPA. 

    If you are going to pay yourself w2 income take a look at payroll provider. gusto.com.  They have a super easy and inexpensive interface. 

    1Reply
  • Richard Sherman
    Rental Property Investor · Salem, OR · Member since 2017 · 696 posts · 660 votes
    7y

    @Max Malec We have the same setup, though our Parent LLC is a partnership (myself and my wife) and this was intentional as a partnership requires it's own tax return, and with the number of properties we had and the income, we wanted it off our personal tax return (if you had a single member LLC it is a disregarded entity as @Christopher Brainard says.  

    We keep a certain amount of properties in each child LLC (20-40 units) and they pay their own bills. Excess income is taken into the parent LLC and we take distributions out of that to our personal account (or use it to fund the acquisition of additional properties. I do NOT believe that you want to pay yourself W2 income (salary) as you would be responsible for FICA on both sides, so that's roughly 14% hit. One of the beautiful things about real estate is that rental income is like dividend income and NOT subject to FICA. Your CPA should be able to answer this question very quickly. When you have enough reserves in the property LLC, just move money to the Parent LLC and write yourself a check from there. Easy, just keep a copy of each check and at the end of the year that is your taxable income from the rental business (plus any reserves of course you kept and minus expenses and depreciation.)

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  • Max Malec
    OP
    Rental Property Investor · Dallas, TX · Member since 2018 · 6 posts · 1 vote
    7y

    @Christopher Brainard @Mary M. @Richard Sherman Thank you all very much for your insight. It is very helpful! I do not believe I need a S corp at this point but I was up until now unsure about the exact legal methods of transferring income to the parent LLC before writing myself a check from there. It seems that since it is all going on my personal tax forms anyway, the most important thing is keeping good records of everything. My CPA and attorney seem to be at odds on what to do, so perhaps it would be best to look for better team members... I appreciate all your help.

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  • Richard Sherman
    Rental Property Investor · Salem, OR · Member since 2017 · 696 posts · 660 votes
    7y

    The attorney will probably want you to have more complexity and maximize "asset protection"...you can add complexity as the relative cost of it makes sense as your assets grow.  :)  Subtle dig at attorneys  ;)

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  • Ronald RohdePro Member
    Attorney · Dallas, TX · Member since 2016 · 5k+ posts · 2k+ votes
    7y
    Originally posted by @Max Malec:

    @Christopher Brainard @Mary M. @Richard Sherman Thank you all very much for your insight. It is very helpful! I do not believe I need a S corp at this point but I was up until now unsure about the exact legal methods of transferring income to the parent LLC before writing myself a check from there. It seems that since it is all going on my personal tax forms anyway, the most important thing is keeping good records of everything. My CPA and attorney seem to be at odds on what to do, so perhaps it would be best to look for better team members... I appreciate all your help.

     It can be confusing in how you refer to distributions of net income. Salary, dividend, retained earnings, etc. all have legal terms. So a disregarded entity won't be able to pay you (the owner) a salary. I think you received some great advice in this thread so hope that clears it up for you!

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  • Jason Hulin
    Member since 2020 · 4 posts · 0 votes
    6y
    @Max Malec @Christopher Brainard @Mary Mitchell @Richard Sherman @Ronald Rohde Thanks for this VERY helpful information. So, then in this case since you can't make yourself a manager of your single member sub-series llc, would your master llc or yourself be listed as the member?
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  • Jason Hulin
    Member since 2020 · 4 posts · 0 votes
    6y

    @Christopher Brainard@Max Malec@Ronald Rohde@Richard Sherman@Mary M.

    Thanks all for this VERY helpful information. So, then in this case since you can't make yourself a manager of your single member sub-series llc, would your master llc or yourself be listed as the member?

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  • Natalie KolodijBusiness Member
    Moderator
    Tax Strategist| National Tax Educator| Accepting New Clients · Member since 2014 · 3k+ posts · 4k+ votes
    6y

    Talk to your tax pro. 

    If this is a partnership and rentals only there is no SE tax AND you can't issue yourself a w2. 

    Podcast Guest on Show Pay Less Tax to the IRS This Year With THESE Real Estate Tax Strategies
    Kolodij Tax & Consulting
    WebsiteView Page
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  • Ronald RohdePro Member
    Attorney · Dallas, TX · Member since 2016 · 5k+ posts · 2k+ votes
    6y
    Originally posted by @Jason Hulin:

    @Christopher Brainard@Max Malec@Ronald Rohde@Richard Sherman@Mary M.

    Thanks all for this VERY helpful information. So, then in this case since you can't make yourself a manager of your single member sub-series llc, would your master llc or yourself be listed as the member?

    Without looking at your documents, you can appoint a manager if manager managed LLC. You can do either. I find its natural for the attorney and CPA to be at odds, the lawyer wants to protect from liability while the CPA wants to minimize taxes--they are not the same goals and the client has to find their own personal balance between the two.

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