Create a new entity for apartment building?

Question

Hi all,

I'm looking to purchase a small apartment building and was wonder if I should create a new entity to deed it into or should I simply use an existing one?  I currently own a couple single family homes and they are deeded into a land trust and the beneficiary is my LLC.  I'm wanting advice is to whether I should use my existing LLC or create a new one.

Thanks so much!

Roy N. · Answer

Jay,

I would recommend also having a dialogue with your accountant before pulling the trigger on the new entity.   In addition to compartmentalizing liability, the correct share structure when creating your entity will make it easier to inject capital at a later time or provide additional options when it is time to divest.

Jay Y. · Answer

Well my asset attorney got back with me and he recommends setting up a separate entity.  I'm sure part of the reason is so he can earn some business but I suppose there's nothing wrong with being extra cautious either.

He did bring up the same point of keeping the bank accounts separately.

Steven Hamilton II · Answer

@Jay Yam ,

Spend the money on a consultation with an attorney.  Most people keep separate LLCs to separate out the liability.  If you personally are found negligent, they can go after your ownership in ANY of your LLCs.

-Steven

Jeff Greenberg · Answer

I am not a lawyer, but if you commingle the funds you may as well keep the one LLC.  You are piercing the corp veil if you share funds.

Jay Y. · Answer

Well, I do see the advantages of creating a separate entity for the new apartment building which may be 18 units when it comes time to sell.  But in my case, the LLC I currently have setup does not hold any properties but is merely the beneficiary of some single family houses.

For a legal perspective if I use my existing LLC for the new apartment and someone sues the LLC, would they be able to sue for the single family houses as well?

I assume if I create a new LLC, all the profit from the apartment can be put into the same account for the first LLC?

Thanks again!

Chris Adams · Answer

Im looking forward to a legal opinion on this. I have been told the corporate veil  can be pierced during litigation IF there is enough equity to make it worth while. I think this is BS but I do not know enough to argue with lawyers on this.

The advice I was given was to separate chunks of properties into separate LLCs, and have a healthy umbrella policy. But when you have an umbrella you have to raise the liability limits on each policy under the umbrella.

Another idea I was told is keep all properties leveraged hard. Lawyers tend not to go after assets that have no significant equity.

I do agree that if there is a plan to sell this property then having it in its own entity can be beneficial, but if your plan is to cross collateralize the equity of your portfolio this could limit that ability.

Roy N. · Answer

@Jay Y.

How many units?

We hold all our "residential" (1-4 unit) along with 5 & 6 unit buildings in our principal company - we see no cost benefit to holding them separately.   We have a 12-unit and another similar sized, mixed-use property in-process which are (will be) incorporated into their own holding companies.

Our main reason for this is to provide more flexibility at the time of divestment:  we will have the option of selling the property or selling the company {with the latter approach, the existing financing would/could stay in-place ... a selling feature if interest prevailing interest rates are higher at the time}