Should I form a different LLC for each property I invest in?
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Real Estate Consultant · USA · Member since 2014 · 1k+ posts · 751 votes
6yOriginally posted by @Ben Feder:
I will be investing in apartment buildings. I think while reading a real estate book a few years back, I learned that you should possibly setup an LLC for each property that you invest in, to keep properties separate and each as a business in its own. Not sure if I'm remembering that right. What are the pros and cons of doing this? Any point to do it or not do it this way? Thanks.
The main reason you would want to do that is to protect your assets from each other. The other big reason is that when you sell 1 you can just sell the company and not the property. This has some tax benefits.
22 Replies
- 6yBernard PearsonPro MemberTeaneck, NJ · Member since 2017 · 15 posts · 10 votes
@Ben Feder hello Ben it depends on your ultimate strategy. If you plan to hold them I would recommend separate LLCs, if these are flips it may not be required and more work/cost than its worth...
- Investor · Philadelphia, PA · Member since 2015 · 172 posts · 58 votes6y
Originally posted by @Bernard Pearson:
@Ben Feder hello Ben it depends on your ultimate strategy. If you plan to hold them I would recommend separate LLCs, if these are flips it may not be required and more work/cost than its worth...
I do plan on holding them. I'm gonna use a BRRRR strategy.
- Real Estate Consultant · USA · Member since 2014 · 1k+ posts · 751 votes6y
Originally posted by @Ben Feder:
I will be investing in apartment buildings. I think while reading a real estate book a few years back, I learned that you should possibly setup an LLC for each property that you invest in, to keep properties separate and each as a business in its own. Not sure if I'm remembering that right. What are the pros and cons of doing this? Any point to do it or not do it this way? Thanks.
The main reason you would want to do that is to protect your assets from each other. The other big reason is that when you sell 1 you can just sell the company and not the property. This has some tax benefits.
- 6yBernard PearsonPro MemberTeaneck, NJ · Member since 2017 · 15 posts · 10 votes
@Ben Feder I've learned a lot over the course of the last few months about setting up LLCs for holds/flips/etc. it's important you to consult a tax pro to make sure you can KEEP most of your profits and not have to pay them all off in taxes. Example: your LLC should be in the state of the properties you are holding to avoid paying cross state taxes. If your setting up your LLC for true protection you may want to consider a Wyoming LLC as your holding company as Wyoming is one of the only state that doesn't require a name of the owner be publicly visible. When you setup your specific LLCs you would list the Wyoming Holding company as the owner... look I'm no pro at the structure (yet) but definitely looking to learn more and get it right... I've been speaking with corporate direct and Anderson business advisors to find the best approach. I haven't settled in on either one of them yet, but will definitely pay the fees to use their services to make sure I get it right up front... the LLC structure is like the foundation of the house my man... it has to be solid...
- Investor · Philadelphia, PA · Member since 2015 · 172 posts · 58 votes6y
Originally posted by @Jim Pellerin:
Originally posted by @Ben Feder:
I will be investing in apartment buildings. I think while reading a real estate book a few years back, I learned that you should possibly setup an LLC for each property that you invest in, to keep properties separate and each as a business in its own. Not sure if I'm remembering that right. What are the pros and cons of doing this? Any point to do it or not do it this way? Thanks.
The main reason you would want to do that is to protect your assets from each other. The other big reason is that when you sell 1 you can just sell the company and not the property. This has some tax benefits.
How would this work with 1031 exchanges though? I would think I'd need to sell one property and reinvest in another as the same person or entity. Is there something I'm missing?
- Contractor · Denver, CO · Member since 2014 · 38 posts · 24 votes6y
@Ben Feder a lawyer friend (contract lawyer at a big firm downtown) told me that an LLC really only provides true protection after a couple layers of business entities. He said some people in a longer term strategy have each property be its own LLC, then a few property LLC's be held by another LLC. Then you own all the top tier LLC's, which only exist to own/manage the lower LLC. In other words, company A owns companies 1-5, company B owns companies 6-10, etc. Its a bit of detail to keep it all sorted and manage the 1031 when you start selling them all, but hopefully youre hiring a good lawyer to help navigate the profits. Consider how most national businesses are owned by other businesses (olive garden is owned by darden, etc).
- Investor · Philadelphia, PA · Member since 2015 · 172 posts · 58 votes6y
Originally posted by @Andy Thompson:
@Ben Feder a lawyer friend (contract lawyer at a big firm downtown) told me that an LLC really only provides true protection after a couple layers of business entities. He said some people in a longer term strategy have each property be its own LLC, then a few property LLC's be held by another LLC. Then you own all the top tier LLC's, which only exist to own/manage the lower LLC. In other words, company A owns companies 1-5, company B owns companies 6-10, etc. Its a bit of detail to keep it all sorted and manage the 1031 when you start selling them all, but hopefully youre hiring a good lawyer to help navigate the profits. Consider how most national businesses are owned by other businesses (olive garden is owned by darden, etc).
Honestly I'm a bit confused by some of that. Are you saying I should layer my LLCs (as the only way I can be protected by the LLCs' existence)? Or does doing that keep you from being able to be sued by piercing the corporate veil (sued as an individual since LLCs are not being used as a business but only protection)?
- Investor · Broward County, FL · Member since 2018 · 1k+ posts · 938 votes6y
@Ben Feder
Using LLC add cost to maintain them. So it is always a cost vs benefit ratio decision that only you can answer.
The LLC entities strategy is to insulate the inside liability risk to only that entity. So if you have an inside liability claim the most you can loose would be everything in that entity. How much do you accept to loose? You can decide that you would put in the same entity five $20,000 properties while your $100,000 one will be owned by a separate one. Or you could decide to have all of them together.
All state have the same LLC protection for inside liability. And usually you would wang to have the LLC in the same state as the property.
Now for outside liability (when someone sue you personally and want to get all your asset), some state have very week LLC protection. That is why you would like to get a holding LLC in a state where the charging order is the only remedy (like WY for instance that also has other great LLC benefits). This holding LLC will be owned by you and will be the one owning the sub LLC in the other state. This layered structure will get you the outside liability protection of WY for your local LLC.
- Investor · Philadelphia, PA · Member since 2015 · 172 posts · 58 votes6y
Originally posted by @Mike S.:
@Ben Feder
Using LLC add cost to maintain them. So it is always a cost vs benefit ratio decision that only you can answer.
The LLC entities strategy is to insulate the inside liability risk to only that entity. So if you have an inside liability claim the most you can loose would be everything in that entity. How much do you accept to loose? You can decide that you would put in the same entity five $20,000 properties while your $100,000 one will be owned by a separate one. Or you could decide to have all of them together.
All state have the same LLC protection for inside liability. And usually you would wang to have the LLC in the same state as the property.
Now for outside liability (when someone sue you personally and want to get all your asset), some state have very week LLC protection. That is why you would like to get a holding LLC in a state where the charging order is the only remedy (like WY for instance that also has other great LLC benefits). This holding LLC will be owned by you and will be the one owning the sub LLC in the other state. This layered structure will get you the outside liability protection of WY for your local LLC.
What is the benefit of having a holding LLC where the other LLCs are layered under the holding one?
- Investor · Broward County, FL · Member since 2018 · 1k+ posts · 938 votes6y
Originally posted by @Ben Feder:
Originally posted by @Mike S.:
@Ben Feder
What is the benefit of having a holding LLC where the other LLCs are layered under the holding one?As explained before, the first and main benefit is to get the charging order protection of the holding LLC for the sub LLC. Let say that you have a single member LLC in Florida that hold your property. If you own directly that LLC, your creditor can force you to liquidate it or take control of it to get their money. If this Florida LLC is owned by your WY LLC instead, your creditor need to access your WY LLC instead as you don't have any direct relationship with the FL LLC. And in WY, your creditor can only get a charging order against the WY LLC, ie they can only get distribution from the LLC but you are still in control of it, and decide if you want to make distribution or not...
The second benefit of using one holding LLC for all the sub single member LLC is to simplify your tax filing. As all the sub LLC will be pass through, only the holding LLC will have one tax filing (at least at the federal level, as you may have state filing in some state). If your holding is also disregarded as a single member, then it won't have a filing either as it would directly be under your personal tax return. If it is a multi member then it will have to file an informational 1065 report and issue K1 to its member. Of course if you elect to have your LLC treated as C or S corp, that would be different, but for long term real estate holding that is not a common choice.
- Investor · Philadelphia, PA · Member since 2015 · 172 posts · 58 votes6y
Originally posted by @Mike S.:
Originally posted by @Ben Feder:
Originally posted by @Mike S.:
@Ben Feder
What is the benefit of having a holding LLC where the other LLCs are layered under the holding one?As explained before, the first and main benefit is to get the charging order protection of the holding LLC for the sub LLC. Let say that you have a single member LLC in Florida that hold your property. If you own directly that LLC, your creditor can force you to liquidate it or take control of it to get their money. If this Florida LLC is owned by your WY LLC instead, your creditor need to access your WY LLC instead as you don't have any direct relationship with the FL LLC. And in WY, your creditor can only get a charging order against the WY LLC, ie they can only get distribution from the LLC but you are still in control of it, and decide if you want to make distribution or not...
The second benefit of using one holding LLC for all the sub single member LLC is to simplify your tax filing. As all the sub LLC will be pass through, only the holding LLC will have one tax filing (at least at the federal level, as you may have state filing in some state). If your holding is also disregarded as a single member, then it won't have a filing either as it would directly be under your personal tax return. If it is a multi member then it will have to file an informational 1065 report and issue K1 to its member. Of course if you elect to have your LLC treated as C or S corp, that would be different, but for long term real estate holding that is not a common choice.
You mentioned a lot of tax lingo I'm not aware of. Will we get mailed something by the government or some other place before tax time what forms we will need to fill out when it comes tax time? How will we know what to fill out?
- Investor · Broward County, FL · Member since 2018 · 1k+ posts · 938 votes6y
Originally posted by @Ben Feder:
You mentioned a lot of tax lingo I'm not aware of. Will we get mailed something by the government or some other place before tax time what forms we will need to fill out when it comes tax time? How will we know what to fill out?
No it is your responsibility to file the proper tax documents. Hire a CPA if you don't know. Anyway, you should consult a lawyer and a CPA together to discuss what entities you would need for asset protection and tax optimization.
- Rental Property Investor · St Augustine, FL · Member since 2019 · 264 posts · 279 votes6y
@Ben Feder. LLC may offer some tax benefits but I think all the lawyer fees and licenses would be extreme when you start layering LLC's to shelter LLC'c. If some one has a creditable law suit against you and has a good lawyer don't think the LLC will give you a Lot of protection. I think one LLC and a good lawyer is enough. But then again I am a small investor with only 7 rentals. Don't really want to be more that 10. Life is to short to have more that 10 tenants.
- Attorney · Southfield, MI · Member since 2016 · 102 posts · 83 votes6y
I am of the opinion that each property has its own LLC. If you have a partner, then have one LLC which you guys own together (a partnership for tax purposes) own all of the LLC's as single member LLC's/Disregarded Entities. Then you have one tax return- for multiple properties while still shielding your other properties liabilities from each other and you. As far as 1031 goes- its the ultimate taxpayer- you if they are disregarded entities, or the partnership if you go the partner route I described above that has to do the exchange- not the LLC that owns the property.
- Investor · Philadelphia, PA · Member since 2015 · 172 posts · 58 votes6y
Originally posted by @Michael Skoczylas:
I am of the opinion that each property has its own LLC. If you have a partner, then have one LLC which you guys own together (a partnership for tax purposes) own all of the LLC's as single member LLC's/Disregarded Entities. Then you have one tax return- for multiple properties while still shielding your other properties liabilities from each other and you. As far as 1031 goes- its the ultimate taxpayer- you if they are disregarded entities, or the partnership if you go the partner route I described above that has to do the exchange- not the LLC that owns the property.
Isn't a "disregarded entity" an entity with a single owner recognized for tax purposes, which is an entity not separate from its owner? How does one form a disregarded entity, and how would that be helpful liability-wise? Wouldn't a disregarded entity not be an LLC and therefore expose the owner to liability? Maybe I am confused on what a disregarded entity is.
- Attorney · Southfield, MI · Member since 2016 · 102 posts · 83 votes6y
Originally posted by @Ben Feder:
Originally posted by @Michael Skoczylas:
I am of the opinion that each property has its own LLC. If you have a partner, then have one LLC which you guys own together (a partnership for tax purposes) own all of the LLC's as single member LLC's/Disregarded Entities. Then you have one tax return- for multiple properties while still shielding your other properties liabilities from each other and you. As far as 1031 goes- its the ultimate taxpayer- you if they are disregarded entities, or the partnership if you go the partner route I described above that has to do the exchange- not the LLC that owns the property.
Isn't a "disregarded entity" an entity with a single owner recognized for tax purposes, which is an entity not separate from its owner? How does one form a disregarded entity, and how would that be helpful liability-wise? Wouldn't a disregarded entity not be an LLC and therefore expose the owner to liability? Maybe I am confused on what a disregarded entity is.
Ben, you are correct. A disregarded entity is an LLC (not a corporation) which has a single owner and is not recognized for tax purposes unless the owner choses to have it recognized. However, tax purposes and legal liability purposes are very different. The LLC which is disregarded, but yet is treated as an entity unto itself, meaning you don't treat it as your own wallet, will provide proper legal liability.
You got the theory right, just mixed up that tax and legal liability are two different animals, and can see the same item in different ways.
- Investor · Philadelphia, PA · Member since 2015 · 172 posts · 58 votes6y
Originally posted by @Michael Skoczylas:
Originally posted by @Ben Feder:
Originally posted by @Michael Skoczylas:
I am of the opinion that each property has its own LLC. If you have a partner, then have one LLC which you guys own together (a partnership for tax purposes) own all of the LLC's as single member LLC's/Disregarded Entities. Then you have one tax return- for multiple properties while still shielding your other properties liabilities from each other and you. As far as 1031 goes- its the ultimate taxpayer- you if they are disregarded entities, or the partnership if you go the partner route I described above that has to do the exchange- not the LLC that owns the property.
Isn't a "disregarded entity" an entity with a single owner recognized for tax purposes, which is an entity not separate from its owner? How does one form a disregarded entity, and how would that be helpful liability-wise? Wouldn't a disregarded entity not be an LLC and therefore expose the owner to liability? Maybe I am confused on what a disregarded entity is.
Ben, you are correct. A disregarded entity is an LLC (not a corporation) which has a single owner and is not recognized for tax purposes unless the owner choses to have it recognized. However, tax purposes and legal liability purposes are very different. The LLC which is disregarded, but yet is treated as an entity unto itself, meaning you don't treat it as your own wallet, will provide proper legal liability.
You got the theory right, just mixed up that tax and legal liability are two different animals, and can see the same item in different ways.
So how would an LLC be formed if I am going into it with a partner, since I can't create a disregarded entity?
- Attorney · Southfield, MI · Member since 2016 · 102 posts · 83 votes6y
An LLC with more than 1 member is automatically considered a partnership by the IRS. Form it with the appropriate state, and get an EIN with the IRS. I would advise you get in touch with your attorney to help you do this, because each state has their own quirks, and your attorney can help with the best structure if you have a partnership.
- 6yDave FosterBusiness MemberQualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
@Ben Feder, it's really a state and federal distinction. LLCs are state specific. There is no federal LLC. There are only LLCs that are "regarded taxpaying entities" and LLs that are disregarded entities" by the fed. Remember 1031 is only a federal statute that happens to be accepted by most states (except PA).
There are LLCs that are single member and multi member and some that choose to file their taxes as a sole proprietor or partnership or even LLCs that file as an S corp. But the Fed doesn't recognize an LLC that doesn't have an EIN and does not choose to be filed as a partnership or S corp.
That's what makes it "disregarded" by the Fed. Since the LLC only has one member and doesn't file it's own tax return the IRS disregards it as an entity and will see the activity of the property owned by that LLC reported on the LLC member's tax return.
Like @Michael Skoczylas, two different issues - tax and legal. I'm kind of with you on questioning the liability protection of a single member LLC. Seems to me there's actually a 3rd distinction in addition to tax and legal - anonymity. But that's for the attorney's like Michael to help us with.
The 1031 Investor5137 Reviews - Realtor · Baltimore, MD · Member since 2018 · 53 posts · 46 votes6y
@Ben Feder
I look at my SFR as a multi. If you have a multi you don't have the option of separate LLCs per unit. Yes, by having separate LLCs you have less liability but it also costs at least $300 a year per LLC. It adds up quickly do reduce liability.
With that being said one of the beauties of SFR is that you can take the best of both worlds. I limit my LLCs to 10 property per LLC.
Disclaimer: I am not a lawyer, for any legal advise speak to your lawyer.
- Investor · Philadelphia, PA · Member since 2015 · 172 posts · 58 votes6y
Originally posted by @Dassi Lazar:
@Ben Feder
I look at my SFR as a multi. If you have a multi you don't have the option of separate LLCs per unit. Yes, by having separate LLCs you have less liability but it also costs at least $300 a year per LLC. It adds up quickly do reduce liability.
With that being said one of the beauties of SFR is that you can take the best of both worlds. I limit my LLCs to 10 property per LLC.
Disclaimer: I am not a lawyer, for any legal advise speak to your lawyer.
When I am talking about separate LLCs I meant for each property, not each unit. Do you do SFR flips or BRRRR or other strategy?
- Realtor · Baltimore, MD · Member since 2018 · 53 posts · 46 votes6y
@Ben Feder
I misread your question🙈 I invest in SFR doing the BRRRR method and flips. I'm not exclusive. This past year I did a lot of rentals... Looking to pick up some flips now so I can continue getting more rentals. I wasn't able to pull out all my money on the rentals.
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