Starting LLC questions - 1 or 2 member LLC

[Zac Kucharek]

1 or 2 members for LLC for spouses when loan/title are under both spouse names:

—————————————————————- 
Hello,

I am starting an LLC and have some general questions. I am using the LLC mainly to shield liability from the rental property from personal assets.

-The property: Duplex that we are house hacking and living in one unit while renting other side out on long term leases.

- mortgage: loan and title under my wife and I’s name 

First question:

I am unsure as to start the LLC with 1 or 2 members. My wife and I both as members of the LLC solely for the purpose that the loan and title are under both of our names so when transferring this property over from personal to the LLC I am trying mainly to prevent the property from technically changing ownership and "uncapping" its value for property tax purposes.
I have been told LLC under 1 name as a single member LLC is less complex and less expensive etc preparation wise. But I would like to avoid uncapping the property value. So if there is a way I can structure the LLC under single never but also avoid a technical “change of ownership” that is my main question!

My LLC is already created and I am filing for the EIN and was held up on this 1 or 2 member step for these reasoning. I know I should consult a CPA or attorney but wanted to get input as some may have been through this. Thank you In advance!

[Greg Kasmer]

Zac - I'm not an attorney, so take my thoughts as just that - my thoughts from my experience in which I've had a single member LLC and a two member LLC. I think you asking two different questions. A single member LLC you can be considered a disregarded entity and therefore have it roll up to your personal taxes without a separate filing. If you have two members of the LLC then I believe you would have to file a separate business tax return and then have the income flow over to your personal return via a K-1. That would add costs to your tax return. I don't think either is "more protective" than the other. As for your ownership of the duplex.... If you already have title and loan into both your personal names then you'll need to change title and loan to the LLC (irrespective if the LLC is a single member or two member LLC). I don't think it will be any "harder" or "easier" changing title/loan into the LLC from a mechanical standpoint, but the lender might be more willing/able if the same people were in the LLC as the original loan. I would contact the lender first and get their opinion. Good Luck!

[Zac Kucharek]

Quote from @Greg Kasmer:

Zac - I'm not an attorney, so take my thoughts as just that - my thoughts from my experience in which I've had a single member LLC and a two member LLC. I think you asking two different questions. A single member LLC you can be considered a disregarded entity and therefore have it roll up to your personal taxes without a separate filing. If you have two members of the LLC then I believe you would have to file a separate business tax return and then have the income flow over to your personal return via a K-1. That would add costs to your tax return. I don't think either is "more protective" than the other. As for your ownership of the duplex.... If you already have title and loan into both your personal names then you'll need to change title and loan to the LLC (irrespective if the LLC is a single member or two member LLC). I don't think it will be any "harder" or "easier" changing title/loan into the LLC from a mechanical standpoint, but the lender might be more willing/able if the same people were in the LLC as the original loan. I would contact the lender first and get their opinion. Good Luck!

Greg,

thanks for your answer! Yeah I am not worried at all about which may have more protections. I am definitely the one doing the work on the LLC as well as the tax complications being lower with a single member versus the spousal partnership. More so just heard that if you transfer title into LLC it can "uncap" the property and cause a new tax assessment the following year and raise your future tax expense. I am hoping to avoid that. So I had read if you transfer into the LLC of like ownership it would not uncap? But would me and my spouse being on the title together and just me as the only solo member in the LLC be a "common ownership" or would it have to be exact and me have both of us as members of the LLC! That's my predicament if that makes sense all typed out.

[Zachary Jensen]

Quote from @Zac Kucharek:

1 or 2 members for LLC for spouses when loan/title are under both spouse names:

—————————————————————- 
Hello,

I am starting an LLC and have some general questions. I am using the LLC mainly to shield liability from the rental property from personal assets.

-The property: Duplex that we are house hacking and living in one unit while renting other side out on long term leases.

- mortgage: loan and title under my wife and I’s name 

First question:

I am unsure as to start the LLC with 1 or 2 members. My wife and I both as members of the LLC solely for the purpose that the loan and title are under both of our names so when transferring this property over from personal to the LLC I am trying mainly to prevent the property from technically changing ownership and "uncapping" its value for property tax purposes.
I have been told LLC under 1 name as a single member LLC is less complex and less expensive etc preparation wise. But I would like to avoid uncapping the property value. So if there is a way I can structure the LLC under single never but also avoid a technical “change of ownership” that is my main question!

My LLC is already created and I am filing for the EIN and was held up on this 1 or 2 member step for these reasoning. I know I should consult a CPA or attorney but wanted to get input as some may have been through this. Thank you In advance!

You may want to have just one of you under the LLC. As you mentioned its a tiny bit more complicated, and there is a question of change of ownership if your currently holding the property in your name. I would speak with your mortgage company before deciding to move the property to an LLC as some mortgages have clauses that can cause issues.

[Stuart Udis]

@Zac Kucharek I will focus on the asset protection component of your post since it appears to be the primary objective. Before you jump through the hoops and incur the transactional fees of transferring this duplex titled to yourself and wife to an LLC can you articulate the liability exposure risks you believe could impact your personal assets? I would imagine there is a scenario or scenarios running through your head which is prompting this discussion and desire to transfer title to an LLC. Beyond that, a bit more color on this duplex would be helpful....condition? Do you frequently require subcontract and vendor engagement (lawn care, snow removal, building maintenance, management company etc.) and if so, do you sign contracts and require that you are listed as additional insured on their insurance policies? Are there public right of ways that are your responsibility and frequently traveled by guests or passersby? Are these right of ways free and clear of any tripping hazards i.e uneven sidewalk?. Are you up to date on all of your licensing and permitting to legally rent this duplex? I'll be able to shed additional light on the situation once I better understand the perceived risks you are looking to protect against and better understand the duplex.

[Tanner Bellamy]

From a tax perspective, having two members in an LLC will generally cause you to file a partnership tax return which is typically more expensive than if you were to go SMLLC route. Which would make the LLC disregarded and the property would go on your individual tax return on Schedule E. Something to consider. I will leave the liability questions to the attorneys.

[Basit Siddiqi]

The question should be will you be getting the liability protection you are looking for when you have a personal asset inside of a business entity?

A house-hack is a property that is both a personal property and an investment property.
Usually, you must maintain separation of business / personal inside of a business entity.

Best of luck

[Jason Malabute]

Based on your assumption that you and your spouse file jointly, I agree with the others in the comments. I suggest listing only your name as the LLC member. This way, you can file as a single-member LLC with your 1040, avoiding the complexity of a 1065 partnership return and issuing a K1. It's simpler and less hassle.

[Ashish Acharya]

Understand that MMLLC will have a partnership tax filing obligation without any tax savings.

If both the mortgage and title are in your and your wife's names, setting up a multi-member LLC with both of you as members might help avoid triggering a property tax reassessment (some counties do that) since it shows continuity in ownership. While a single-member LLC is simpler, it could be seen as a change in ownership, potentially causing the property's value to be "uncapped" for tax purposes. Given your situation, a multi-member LLC could be the safer choice to keep things straightforward with the property transfer.

[Randy H.]

Zac, after being a full-time real estate investor for the last 53 years I have learned a few things about how to hold title and asset protection. Here is my suggestion for you to consider. First, NEVER own real estate in your name personally. It is just too risky. Take title directly from the seller to a Trust. Make the Beneficiary of the Trust your LLC. There is NO registry for Trusts (like there is for LLC's and Corp's) so you get total privacy of ownership...which is your first line of defense when it comes to crazy tenants and contingency fee lawyers (and their dead-beat clients). The more successful you become, the bigger target you are for a frivolous lawsuit. Regarding single member vs. multi-member LLC's, you need "Charging Order Protection" (COP) to receive the best asset protection benefits. The problem is that single-member LLC's (husband and wife members are considered as only one member) do NOT give you Charging Order Protection unless you form the LLC in WY, NV, DE (and maybe 1 or 2 other states). What this means is if you form your LLC in a state that does NOT have COP, you do not have good asset protection (Google the Olmstead case in Florida). This may all seem overwhelming to you, but it is not. And besides, what is your net worth...worth? If it is worth your time, energy and money to build your assets, it is worth some time to learn how to protect it! Respond back if you want to discuss further.

P.S. A trust saved me from losing a 3.2-million-dollar property years ago. That's when I became a true believer!