Setting up LLC'S. How should wife be involved ?

48 Replies

I just closed on a flip today and spoke to the attorney about setting up an LLC. Ive done several flips now and have rentals so i think its time. They suggested i do two LLC'S so that i have one for my rentals, and one for my flips.
Also, I just got married last month. How would my wife come into the equation now since this has been my business from the start?
I operate here in Texas.

Add her as a member to the LLC...In Arizona its very easy to do ...I'm assuming that in TX it is even easier...

The key part is that you have  a operating agreement.. 

This agreement will tell others who is in charge and can sign for any documents.

When you close on any property the title company will want to see a copy of the agreement.

LLC are owned by Members. And if you add you wife as a member she is an owner...

Each member has a percentage share of the LLC the operating agreement spells out the percentage...

@Matt P. Well that's obvious that i will. Want advice from others and how they have approached it.

In Texas, what you own prior to marriage is separate property and will remain separate property unless you commingle the asset. 

Personally, I have never added my wife to my LLC nor would I as it can create issues with titles companies wanting all members to sign at closing

@Greg H. But what about ownership ? Since i started this flipping thing before marriage,(money invested is mine) shouldnt i be the sole owner ? Or since i am starting the LLC now that i am married, without her on it, she'll still be entitled to what the LLC owns ?

Assets that you owned before the marriage remain yours. Renaming them or putting in an LLC doesn't change that

However, any profits made or increase in value moving forward are community assets 

Disclaimer:  I am not a lawyer 

@Greg H. "Profits made during marriage" that's what I was looking for, good point.

@Maugno M. I am in the process of the same thing. I am going to start a series LLC because you can start multiple LLC’s under the parent LLC. Shoot me a msg if you would like to know who I am using.
@Maugno M. keep in mind that in many states, a multi member LLC has much better asset protection than a single member. It may be worth adding your wife as a member.
Originally posted by @Maugno M. :

@Dennis Dahlberg If she is added as a member, she is also an owner ?

Yes. An LLC member is analogous to a corporation shareholder.

Even if you don't add her as a member, she owns half of your LLC under TX's community property rules (assuming no pre- or post-marital agreement).

Originally posted by @James Miller :
Originally posted by @Maugno Mora:

@Dennis Dahlberg If she is added as a member, she is also an owner ?

Yes. An LLC member is analogous to a corporation shareholder.

Even if you don't add her as a member, she owns half of your LLC under TX's community property rules (assuming no pre- or post-marital agreement).

If he uses separate funds(separate property previous to marriage) this is not the case, correct ? She would be entitled to 1/2 of the increased value of the LLC's assets and profit after marriage

Originally posted by @Greg H. :
Originally posted by @James Miller:
Originally posted by @Maugno Mora:

@Dennis Dahlberg If she is added as a member, she is also an owner ?

Yes. An LLC member is analogous to a corporation shareholder.

Even if you don't add her as a member, she owns half of your LLC under TX's community property rules (assuming no pre- or post-marital agreement).

If he uses separate funds(separate property previous to marriage) this is not the case, correct ? She would be entitled to 1/2 of the increased value of the LLC's assets and profit after marriage

Inception of title rule: LLC formed after marriage means the LLC is community property. Doesn't matter how funded.

@James Miller

With all due respect, I would agree and disagree

Say he owns a property when he gets married. He then transfer the property to a LLC. While the separate property asset has mutated it would still be considered separate property. Agree ? In the event of a divorce, barring other factors, that asset could be traced back to its original source. I see the point about the LLC itself being community property but the LLC itself is of no value without the asset. For example, if I have cash that is separate property and then use it to buy a boat, that boat is still separate property

@Maugno M. If you just got married, and already think in terms of what's mine and what's hers and who gets what ...you have much bigger problems coming your way. Marriage is an even longer term "investment" than real estate investing and requires constant work. 

Texas is a community state - everything splits in half, unless you have a premarital agreement. So, if you want her (and she wants too) to participate in your family business endeavors, you should add her to the LLC. Otherwise, it doesn't matter, she "owns" you.

You are in Texas, you should look into Texas Series-LLC for the asset holding entity. You should separate the passive side from the active side of your business, meaning that you should have another LLC (and suggesting also a Series-LLC) for your flipping business (you want to separate liabilities if you are doing multiple projects at same time and once you sell a property, you want to leave dormant the child Series-LLC used to acquire and hold that flip).

And if you are doing self property management, you should have a separate operations LLC for all the public interfacing, hiring of contractors, dealing with tenants and leasing, etc. with a property management contract with the asset holding entity. Same idea of separating passive (holding the property only) vs. active (leasing and property management) - not sure if you could have this as one of the child Series-LLC of the flipping Series-LLC or there might be some caveats. Talk with @Scott Smith for specialized advice on how to properly setup this.

Originally posted by @Greg H. :

@James Miller

With all due respect, I would agree and disagree

Say he owns a property when he gets married. He then transfer the property to a LLC. While the separate property asset has mutated it would still be considered separate property. Agree ? In the event of a divorce, barring other factors, that asset could be traced back to its original source. I see the point about the LLC itself being community property but the LLC itself is of no value without the asset. For example, if I have cash that is separate property and then use it to buy a boat, that boat is still separate property

Family code presumes commingled separate property with community is community property. The LLC interests would be community. But unlike contributions to a revocable trust where the property often retains its separate/community nature (Via the trust instrument) you're playing with fire if you're expecting contributed real estate to fully retain separated property character. If that's your desire, you need to do a pre- and post-marital agreement.

Just as the Attorney on this post and others have stated, it is also my understanding that the LLC was community property in Texas, just like the properties purchased after we were married. My wife is not on title to any of our properties because I simply did not want an extra person involved in documentation, signing, etc and she is 99.9% not involved (she has her own business and I am 99.9% not involved). I looked at the LLC the same way, so I did not add her as a member just so I didn't run into any issues down the road requiring another person in the transaction. If I need to add her, I will. If things go south, I already know she gets half regardless. In regards to your wife, is she, does she, or do you require her to be involved in the day to day business in anyway? The answer to this should help you decide IMO. As someone stated above, you are working about the wrong thing. You already signed the contract of marriage, now you are you trying to negotiate the terms :)

@Maugno M. I have read several of the comments, in this thread. I can speak, from Personal Experience that you DO NOT want your wife owning a percentage, in any LLC or other Corporate Entity. What happens if your marriage ends, in divorce? Your wife will be entitled to equitable distribution of ALL assets acquired (WORSE CASE IS 50%), during the life of the marriage. Depending on your wife’s Skill Sets, you could hire her as an employee and issue her a 1099 at the end of the year. This would be a Business Deduction, for you, and her Income would applied to a 1040 Federal Tax Return and possibly a State Tax Return depending on whether or not your state requires such and depending on what state your Corporate Entity is registered. I hope you find this information useful, in guiding you how best to move forward.

@Maugno M. I totally agree that @Costin I. is spot on. IF you put a ring on that finger, I would figure out how to protect the two of you mutually together, not to separate before and after assets. She owns you anyway unless you have prior agreements, but doing LLC's can be smart. I know local attorneys that own properties and do NOT do this, as you have to do a separate tax return for each one and they cite you have to be proven negligent to get sued, not to mention everyone worries about that even though national numbers don't support those worse case situations. With that said, we did several separate LLC's for each apartment unit and one attorney said to make it easy, use the street name in each one. For example, PowellProperties21stPl, LLC PowellPropertiesMiltonSt, LLC these are my real life examples.

Originally posted by @Thomas Franklin :
@Maugno Mora I have read several of the comments, in this thread. I can speak, from Personal Experience that you DO NOT want your wife owning a percentage, in any LLC or other Corporate Entity. What happens if your marriage ends, in divorce? Your wife will be entitled to equitable distribution of ALL assets acquired (WORSE CASE IS 50%), during the life of the marriage. Depending on your wife’s Skill Sets, you could hire her as an employee and issue her a 1099 at the end of the year. This would be a Business Deduction, for you, and her Income would applied to a 1040 Federal Tax Return and possibly a State Tax Return depending on whether or not your state requires such and depending on what state your Corporate Entity is registered. I hope you find this information useful, in guiding you how best to move forward.

 In Texas it doesn’t matter if the wife’s name is left off. Stil half gets due to community property rules. Also, employees get W2s not 1099s. Be careful with that distinction as paying 1099s to persons who should be W2 employees can trigge back payroll taxes owed to the governments and the employee.

@Greg H. Yes ,I believe your going the same way im going on this too. Or atleast the same brain thoughts on this. Logic, atleast to me. 

@James Miller Thank you for the insight. I'm setting up my LLC,LLC,S. I want to have an understanding or more of it ,to be asking the right questions. And to overall know what im doing. Most likely either way my wife will be in it, she wants to be.....

@James Miller , @Greg H. lets take divorce out of the picture, lets say they live a good marriage but something happens to him and he passes ( sorry it's morbid, but thinking Estate wise) if she owns half of the llc ( the property) then the basis upon his death would only be raised his half of the assessed value of the property, being she owns half, would they not ? if she is not on the llc and he passes then the basis would be the full assessed value of the property, correct ? or am i thinking wrong on that ?

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