I have only one rental at this point, but was advised it might be ideal to setup one LLC for the actual real estate company in addition to an LLC for each property. I believe the reason was to protect ourselves in case a tenant were to sue for anything. I also have a $1m umbrella policy for all properties I have or will have.
Does anyone have a suggestion for how to properly set this up? Thank you!
As far as setting up in California is just with the Security of State website. It's under 5 pages , just filing forms. After digging more into it with attorneys, they say LLCs don't offer real protection because veils are pretty easy to pierce. I'm in the same boat as you wondering the value in LLCs. Learning that having robust policy is really good. If you have your rentals properties all in your name then 1 umbrella policy for $400 could cover them all to a point (like if it's 5 properties they may charge more). Each LLC or social must have their own umbrella policy thus this is where the savings would be. Anyone else chime in?
This LLC topic comes up daily on BP. Try scrolling through the discussion threads (or go through my posts). I'm on my phone so can't really reiterate everything. Main sticking point for most is when Title is held by LLC, you have to use commercial loans. An entity doesn't qualify for conforming residential loans.
As mentioned, you need insurance for the properties inside the LLC. One big issue is so that the insurance company legal team will handle the lawsuit. No point in segregating your assets in an LLC only to effectively lose everything to legal fees.
Yes, maintaining and protecting your corporate veil is key. Otherwise, what was the point of the LLC. Many people "do things" with the LLC's, but it doesn't make it right in my layman's opionion. It's a pretty "tricky" act to follow since it's all governed by State laws and jurisprudence. You really have to avoid co-mingling your funds and operating your LLC as an entirely separate entity from yourself. Using it as your alter-ego (such as transferring Title back into your name to get cheaper, residential financing in my opinion) pierces your corporate veil.
In the end, you need to talk to eithe me one really good qualified professional or a few. It’s up to your risk tolerance, what assets you are trying to protect, and what you want to afford. One of the accounts on bp put it nicely (I think it was Sadiqi):
100 rentals in your name
100 rentals in one LLC
100 LLC's each with 1 rental
Any of the combos or in between is possible, and actually done. It’s up to you.
Oh sorry. I see you were also asking about the mgt LLC setup. Yes, one additional way to "slice and dice" your liability to continue the segragation is to have one mgt LLC and any number of property LLC. The latter holds title to the property(ies). You have a lawyer draft up a legal agreement where the mgt LLC takes over the renting of the properties from the property LLC. One way I suppose to think about it is the mgt LLC is taking about a triple net lease from the property LLC. Now the mgt LLC rents out the properties and makes all the payments.
So, if the tenant wants to sue, it is suing the mgt LLC because that is their landlord. Well, what can the "get" frommthe mgt LLC? Just whatever funds are in itsbank account, and maybe the rents that re due to it on the existing leases. It doesn't own the property. You get the idea?
You would be the member of the mgt LLC and the property(ies) LLC. If you want, you can create a holding LLC of which you would be the member, and the holding LLC would be the member for the mgt and property LLC. Why the holding LLC? Just if you were going to go hard core and more LLC's/ business ventures... the LLC's don't change your taxation result (you take all the same deductions). One exception is if you have non-spousal business partners, then you really need an entity for accounting and legal reasons. The other advantage of the holding LLC is so that funds are moved from business account to business account. Less chance of co-mingling with your personal funds by having to move funds to your account and out. So, you just take owner's draws when you want to and there are no other transactions basically between your account and the holding LLC business account (always follow lines of privity/ownership).
Hope this helps. Good luck.
I have been thinking about this very thing and actually posted a question before I saw this thread. For the "Management LLC," are you leasing the property to it and then allowing it to sub lease and maintain the property? I'm thinking about doing this for my property in order to establish a new LLC with the intent to move the assets to it at a later date.
Pretty much... I don't do it, but that's the concept. You split the ownership of the property and the management of it. Its like writing a triple net lease or getting a property management company involved. In both cases, somebody else is taking care of paying all the bills. If not, you'd have to transfer the funds, correctly, to the property LLC the bills can be drafted from its bank account. the property LLC basically will have a zero/near zero bank account and just sit there.
I've written constantly about moving Title of a property from your personal name to LLC --- I mention it in my first post in this discussion thread. To do it really "right/cleanly," you really need to purchase the property directly in the LLC.
I suppose in theory you could have a mgt LLC and hold Title to the property personally. However, I've heard this doesn't really provide any legal protection. You need to consult with at least one qualified attorney.
@David M. Thanks for your very detailed input! I believe I understand the general concept, but I would feel much more comfortable speaking with a real estate attorney. I believe I have a good setup but need to be certain before growing any further. At least, I'm at four properties now. Thanks again!!!
Listen to David here, he knows what he's talking about. You're right about needing to speak with an attorney about this. Before you reach out to a real estate attorney, know what questions to ask to do proper vetting. Also, if you need some more background about asset protection with an LLC and how you should use both insurance and an LLC, here's a good article. As David has pointed out, asset protection is more complicated than just setting up and LLC or getting insurance. This article goes over a few different methods that real estate attorneys use for asset protection. Finally, there are different types of LLCs and these different LLCs help in different scenarios. For instance, there are at least 4 different types of LLCs and they pay taxes differently. Some LLCs might be better for real estate investors as opposed to small business owners. In my opinion, any pass-through entity like an LLC is important for protecting your assets. These articles are a great primer on how the LLC can be beneficial to your real estate endeavors.
Best of luck in your search for a competent RE attorney!
@Cal Dunagan thanks so much! I absolutely appreciate the advice you and David provided and I'll feel much more comfortable asking the appropriate questions when meeting with them. Thank you both for your time and experience when responding to my initial question.
Just to clarify what I think mr dungan is saying about the types of LLC. Other than series LLC's, there is really only one type. But, you can elect to be taxed differently (like a sole proprietor is single member, partnership, S Corp, and C Corp). But, that's an accounting issue, not really a legal issue.
If you want to chat before talking to a professional, send me a direct message and I’d be happy to chat with you.
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