One LLC or Many LLCs?
Rental Property Investor · Cary, NC · Member since 2014 · 89 posts · 10 votes
Hi! I would appreciate suggestions about forming LLCs. I plan on doing most buy and hold investing. I will buy single family homes and rent them out.
Should I form one big LLC for everything? Or should I form one LLC per property?
Do you have any experience with websites such as LegalZoom as far as forming an LLC? Are they adequate or should I contact a lawyer?
Thanks
I tried to get a bank loan using the LLC but they will not even consider if the LLC does not have more than 2 years in business and proven income. No matter how many properties I can put as collateral. So to get a loan from a bank using a new LLC is very hard. I had to got to private lenders. With regards to asset protection. Having multiples LLC does not meant that you are immune to lawsuits. Anyone can sue you for any reason. But definitely it gives you legally more protection than having assets on your own name. The key to avoid frivolous lawsuits when you posses many assets is to structure it in a way that you can use it but don't own it. That is how all the wealthy people do. They don't own anything under their own name. They always have several trust and companies that owns everything they have. I don't put one LLC for each property because that will be a nightmare to manage. I do balance each LLC to hold assets values that I'm comfortable with.
@Julia Blythe you may have a great accountant but I would suggest getting a second opinion on an LLC for every property. First accountants are not trained to the best of my knowledge in asset protection, maybe some are. Rick folks will put motels and apartment buildings in separate entities. It does not seem rational to put every house in its own LLC. The added cost of annual fees, added book keeping added minute generation, added bank accounts added K1s, added depreciation spreadsheets added costs of dissolving corporations would buy many millions of dollars of an umbrella policy/
If you have 10 properties at $50K each and it costs you an added $1,000 per corporation that is $10,000 and you will have very substantial time involved as well. you can probably buy 10 or 20 million in an umbrella policy for half of that. Even if you only have 5 properties at $100,000 each it will cost you $5,000 for separate LLCs. That can turn a profitable year into a break even year and a break even year into a negative cash flow. The trick in all lawsuits against a corporate entity is to pierce the corporate veil. you have to maintain all corporate formalities to avoid that. Annual meetings, minutes of every meeting, separate bank accounts, separate books, etc. Plus if you self manage you are going to be personally sued anyway. If you have professional management that means a separate contract for each property, separate books for them. Some management companies will not do single properties, or will charge more for them because of the extra paperwork. The big advantage to LLCs is having the ability to restrict transfer of ownership of assets and limiting your claim to the proceeds from the LLC, with no forced payouts. That means they have have a personal judgement against you already for that protection to kick in. Otherwise its protection is the same as as a Sub S Corp. I think Florida and Colorado both had a case that dropped some protections on one member LLCs. It is hard for me to imagine a situation where you could get a larger than $5 million judgement and not have a huge potential for personal liability. Keep in mind if your accountant is doing all of the taxes and annual reports and accounting for all of those separate entities he is making a killing off of you. How many lawsuits has this accountant actually done? I have done piercing the veil lawsuits, and I think separate entities for each house is nuts. Especially if you have to personally guarantee the loans or provide private collateral for getting a loan. The really big reason for a separate entity is if the business fails, so it doesn't pull all of your other businesses down with it. If your company is not large enough to get loans without your personal guarantee it seems like overkill. I would strongly recommend a second opinion.
If you are happy with your entities this way and are profitable great. I do not want you to do anything you are uncomfortable with, I am just suggesting a way that may make your life simpler and much more profitable. Good luck what ever you do.
@Jerry W., I appreciate your thoughts and wisdom. I am very confident in my CPA's advice and that is why we have our LLCs setup as a Series LLC, as stated earlier. I don't think Wyoming has this available, as it is only available in a handful of states. Here is a brief synopsis of what it is:
The Series LLC offers different advantages and disadvantages and is relatively unknown even though it has also been in existence for a number of years. Delaware, Nevada and some other states now have paved the way with this concept. The basic concept of the Series LLC allows business owners and investors to place all their assets into one master LLC, but to segregate the assets for liability purposes. As an example, there would still be liability protection for each asset. If you had 10 separate businesses and each entity had its own California LLC (instead of a Series LLC), a gross receipts tax would be due for each entity. Whereas with a Series LLC, only one gross receipts tax would be due. Therefore, a Series LLC would still have asset protection and only one gross receipts tax.
-I do form one LLC for each property for more protection. And I'm having separated trusts to hold them. The LLCs are beneficiaries and the management company is the trustee.
-For me It doesn't cost me $700-$1000 as you guys said to maintain an LLC. It does cost me $1200 to form my 1st LLC with an lawyer, but then I just file the second using incorporate.com (like legal zone), and then file all the rest of LLCs by myself using the same method and structure the lawyer used to file my 1st LLC. For tax filing, I bought TurboTax Download version, which can file multiple tax returns. It's easy to just input some number of rental properties for each LLC in the TurboTax software. So it costs me like $325 annual renewal + $60 paid to IRS to file taxes / LLC, plus $160 total for purchase the Turbotax software.
Btw for forming trust there is no cost, but using just a few pieces of paper is good. The trust will help a lot for privacy and sometimes lawsuits die because the plaintiff don't want to pay extra money to find out who the real owner is. But always remember a trust doesn't provide protection, but just privacy. LLC does.
We had to research this for our international clients and it appears there are 2 camps both of which are sort of right.
But the bottom line is that the main risk is unencumbered equity being exposed and this is easily fixed with some good loan documentation so it is definitely a waste of money to have 1 house per llc. Our rule is 1 million dollars per entity.
Plus if you self manage you are going to be personally sued anyway.
@Jerry, what does this mean exactly? Does this mean that if don't have a property manager, I create a big hole in the LLC armor? Why is this? Can you elaborate further? I've also read that some people who self-manage create an LLC for the property management company. Is this a good strategy?
@Julia Blythe and @Jerry W. - I have read before that you can incorporate your LLC in a state where you DO NOT live. For example, Delaware seems to be a popular state for forming LLCs for out of state folks.
I live in NC and I don't think we have series LLC here. So can I form my series LLC in Delaware even if I live in NC and all my properties are going to be in NC? What are the repercussions of this?
You may want to look into transferring the properties into an existing LLC after purchase. This is common. Many of us didn't start utilizing LLCs until we had multiple rental properties. Until that point, we personally felt umbrella insurance and good landlord insurance was adequate. The amount of properties we place into each LLC has more to do with equity than a strict number of properties. Just one take on it!
How do you do this exactly? How do you transfer properties into an existing LLC?
If you are managing the properties or involved in the rehab, an LLC won't protect you from something you do wrong.
If a tenant tells you they smell gas, and you don't do anything about it, the house blows up and someone is hurt or killed, I don't care if you have 100 LLC's each being held by another entity,,,you will held personally responsible,,,which is why insurance and management style are your first line of defense in protecting from lawsuits
@Julia Blythe and @Jerry W. - I have read before that you can incorporate your LLC in a state where you DO NOT live. For example, Delaware seems to be a popular state for forming LLCs for out of state folks.
I live in NC and I don't think we have series LLC here. So can I form my series LLC in Delaware even if I live in NC and all my properties are going to be in NC? What are the repercussions of this?
You can setup LLC in another state and purchase properties in your state. The pros are you can choose a tax friendly states that provide anonymosity on LLC owners (the records are not public). Wyoming is one of the states that offers this advantages. The cons is you still have to register your foreign state in your local state and you will be paying double annual fees for both states plus if you use a register agent you will have to pay 2 register agents and you will hay to pay.
You may want to look into transferring the properties into an existing LLC after purchase. This is common. Many of us didn't start utilizing LLCs until we had multiple rental properties. Until that point, we personally felt umbrella insurance and good landlord insurance was adequate. The amount of properties we place into each LLC has more to do with equity than a strict number of properties. Just one take on it!
How do you do this exactly? How do you transfer properties into an existing LLC?
You can't just transfer with a quit claim deed. That will be considered a gift that you gave for free to your LLC. I think the only right way is to sell it to your LLC. Then you will have to pay for the taxes for this transaction that will cost a couple of thousands. So instead of wasting this money just do it right the first time.
If you are managing the properties or involved in the rehab, an LLC won't protect you from something you do wrong.
If a tenant tells you they smell gas, and you don't do anything about it, the house blows up and someone is hurt or killed, I don't care if you have 100 LLC's each being held by another entity,,,you will held personally responsible,,,which is why insurance and management style are your first line of defense in protecting from lawsuits
I think in this country we are exposed to frivolous lawsuits all the time. When people know you have assets you are exposes and in our lifetime we will have to deal with some lawsuits if you are going to own a lot of assets. Even the most unreasonable lawsuits. I agree we must be very careful and understand the laws before becoming a landlord. That is our first line of defense. Then all properties must have GL insurance and personally get an extra layer of umbrella insurance. Nevertheless the laws are clear that and LLC is a company and your personal liabilities cannot extended to your companies. They key is if you can put more than 2 partners on your LLC. The more shareholders you have on your LLC the better will be your protection. We are not talking only about lawsuits caused on your properties. This will shield lawsuits caused outside of your properties like in your job, or if you run into someone, etc. I believe having LLC is an extra layer of protection that any serious investor must have.
You will not get traditional financing in the name of an LLC. What I do is this - I get conventional loans in my name to purchase the properties, but then I transfer the property into a LLC using a quitclaim deed. Many have told me that the bank has the right to call the note once the title is transferred, but that hasn't happened yet, and from what I hear, it's unlikely to happen as long as you are current on your payments. After you acquire 10 properties under your name though, traditional financing won't be an option any longer with most banks out there.
I am also a huge proponent of not paying off the properties. Having a mortgage against them and having them in separate LLCs gives you extra protection. If someone sues the LLC and all that LLCs owns is one home, they can technically go after the equity of the home. Well, if it is mortgaged, what will they get? Probably not that much.
In any case, consult with an attorney and yes, get a good umbrella policy.
I was taught there should be one parent company (corp or llc) and then an llc for every rental property. The owner of the rental property llcs would be the parent company, not you personally. Flipping/Rehabbing/Wholesaling would be done under the parent company.
It does not cost much to form an llc and the process is pretty simple. This is the route I will be taking for tax and protection.
@Julia Blythe, I am familiar with series LLCs, but have never formed one. @Christopher R. , you can incorporate in a state different from where you live, but it must be registered in the state where you own the property. Some states like California will tax you on an entity you own out of state. last I heard the beginning amount was $800 there. As to liability when you manage. If the tenant complains that he has headaches when he goes home and something is wrong and you do nothing, and someone dies from monoxide poisoning you will be sued personally, and all of the LLC's will not help you in any way. If they slip and fall on ice and it is their duty to remove snow and ice the LLC will help if they sue. Most lawsuits must claim negligence and breach of duty, they always name the action of a person so if you are the manager it is likely you will be named in any lawsuit.
@Christopher R. Everyone has already made it clear that you should speak to a local attorney to get advice tailored to your situation.
I just want to add/clarify that the reason many people form entities in other states are because of the benefits that state offers to businesses. Delaware is the king of this; not only do they offer low taxes and tons of flexibility when setting up your business, but they also have their own separate court system just for businesses, and a long history of well-established case law and statutes.
All of this means that there's fewer headaches when forming your company there, because everyone knows what to expect.
And here's a little blurb about Series LLCs: What is a Series LLC?
But the bottom line: Pay an attorney first to get it right for your situation.
@Will Porter - Does it seem like I'm trying to do this myself? Ha ha. I'm cheap (and stubborn) that way. I'm just cringing at how much a lawyer is going to charge me to set this up. But I may have to bite the bullet and just do it.
@Christopher R. Commercial loan. I'm in a small town and my banker knows me personally. He wouldn't let me get a homeloan.
also, the yearly cost to maintain an LLC varies by state.
We always hold one house per LLC. Every asset you commingle puts the other asset at risk. Also, why would you not hold each property in its own LLC? IF all that LLC does is hold that property, the paperwork is minimal, and your accountant should not charge you much to "check" your paperwork.
Joe Villeneuve
REcapS Systems
I don't know if anyone else has said it, but you can get a Delaware Series LLC and put many different assets into it that can be insulated from each other in one LLC.
How much an LLC costs to maintain depends on the state you're in and how the LLC is structured from a taxation standpoint. Our LLC has filed with the IRS to be taxed as a Sub-S corporation, which allows for pass-through taxation and no corporate tax. Texas is very "tax friendly".
As for whether or not you need multiple LLC's, I personally suggest you check to see whether Serial LLC's are accepted in NC. They are in Texas and provide the perfect alternative, since 1 LLC can hold unlimited Series, each of which can operate separately (contract, sue, be sued, etc.). As long as assets can be tracked clearly by Series, there is no shared liability across Series or back to the parent LLC.
Some people will probably try to tell you that the Series LLC is "new" and hasn't been tested in court. That is flatly not true. Its first use was in Delaware, and the Series LLC has held up in court test across the country.
You will not get a bank loan for your LLC.
You only need proper umbrella coverage for your homes.
If you had an LLC for each property it would turn out to be a cash flow killer for example, you pay money to form an LLC, you will pay a yearly renewal fee for the LLC and you will have to file a separate tax return for each LLC. On average it would cost you all together around $1,000 the first year then about $600 on average every year after that.
Good luck
Curt,
I feel the same way about LLC being a cash flow killer. However, I just found out that my umbrella insurance will be cancelled next month since the maximum allowed is 4 properties, currently I have 7 and looking to buy more. Do you know any good umbrella insurance (low cost, good coverage, allow many properties)?
Thanks,
Joe
I also had my umbrella not cover any rentals once we got past 4. May be a good new thread topic.