Forming LLC to govern the rest of LLCs

44 Replies

This will likely be an easy question for some of you.

So, if I generate 3 LLCs, 2 of which hold 1 rental home in each, and the 3rd which is the main LLC that owns all other LLCs under it...

How do I make that true?  What I mean is, how do I get the hierarchy on paper?  

ABC LLC governs YY LLC and ZZ LLC. But how do I make it on paper so that this is true?

After I create 3 separate LLCs, then how do I get the ABC LLC to have possession and ownership of the other 3?

At the moment I do not have any LLCs created. Do I need to make ABC LLC first, and then if that matters, how do I fill out the articles of organization (or whatever other form is required) to make YY LLC and ZZ LLC a holding?


I'm sorry if I'm confusing the question...

I own around 60 rental units, build new homes, own a half interest in a used motorcycle shop. I haven't got big enough for an LLC. Based on the nightmare you are trying to describe, I probably never will. As a retired CPA, I don't understand why someone would tell you to do such a thing.

ABC LLC would be formed first and then it would form and own YY LLC and ZZ LLC.

Also interested in why you would want to do this though....

there are big investors on this board that at least have an llc for every property.  

One investor friend suggested this also,  1 llc to own all other llc...  Basically more protection. 

Merry with an attorney today who said the same. 

protection from what? Get fifty properties, then worry about protection. I have an associate that has 4 LLCs for about 40 properties. An accounting nightmare. A headache for everyone involved. Each time someone pays rent you have to know which LLC. Which bank account, what receipt book. Which checkbook to pay for what expenses.

Just have liability insurance and get a hundred and fifty properties, then lose sleep over it.

Protection from one tenant jeopardizing the other homes if one sued me. 

It is what was suggested,  but yes I agree,  paperwork nightmare. 

a couple questions

Sue for what? 

An Insurance company will defend you if you get sued. (Or more likely settle the suit) if you are negligent or criminal you would probably be personally liable anyway. I just am not sure what you could do that you could get sued for, unless you are criminally negligent. If you get sued for a frivolous item, insurance should take care of it. Plus having an LLC does not mean that you don't need the liability insurance.

Will all your properties be free and clear?

      If your properties are not free and clear, there will be little to sue for, no real available

assets.

You can do what you want, but I would advise you to build an empire first. Then figure out how to protect it. 

Keep it simple.

@David Roberts  

I have to agree with @Arlan Potter  

I only see the legal structure you are describing with my larger commercial clients who have annual sales in the $25MM range.  When I see multiple llc's with my landlords it usually has to do with keeping equity partnerships separate from one another, not liability.  With the $ you would be paying your CPA to manage the books on these multiple llc's , you might as well just buy a $10MM Umbrella and never have to worry about getting touched by a suit.

I have one LLC per property and I don't find it to be a nightmare (although I am a CPA). Each LLC has its own bank account and I find that compartmentalizing each property keeps me organized and allows me to analyze the performance of each investment in more detail.

I am still not clear as to why you would want a third LLC to manage the other two though. I don't see any real purpose for this entity.

This is my opinion, not legal advice...I agree with the others that are questioning the reasoning for this structure. If you are out there screwing people, they'll find a way to pierce the corporate veil and get to you personally, LLC or no LLC. If you aren't out there screwing people, most of your exposure is from frivolous suits and accidents. That's what insurance is for, so no gain from the LLC here, either. Your biggest exposure is legal fees to defend yourself, not judgments, and having an LLC won't eliminate the need to defend yourself should the occasion arise (and if you get bigger, the need will arise, trust me).

There may be some value in LLCs if you have substantial assets and are concerned about the exposure to those assets resulting from personal negligence. For example, you run over a kid on your way to the grocery store and your insurance limit is exceeded and your millions in real estate is placed at risk.  But...umbrella policies are designed for this type of risk.  Get a big policy.

Your proposed structure would likely result in three tax returns to file and their associated cost to prepare, plus state fees that may be assessed on each on an annual basis. The cost of which likely far exceeds the cost of insurance.

If you are determined to move forward as you outlined, you form the "manager LLC" first, and then the subsidiaries. If your state asks for the names of the manager, the subsidiaries name the "manager LLC". Each LLC needs an operating agreement, and the operating agreements of the subsidiaries would name the "manager LLC" as either the sole member or the manager, and would vest ownership in all of the units in the name of the "managerLLC".

I have the exact structure that you describe, but I have it to seperate equity investors in one opportunity with investors in another. For example, an apartment complex with one set of capital investors is in one LLC, while a portfolio of single family homes with a different set of capital investors is owned by a different LLC, and the LLC's are all managed by another LLC or corporation. It's not about asset protection, it's about segregating a variety of investment structures.

I suggest that you get the advice of a business attorney, CPA, and insurance consultant before you decide on your ownership structure. Beware of the "asset protection" attorneys, and don't make your decisions based on what you hear from well meaning friends, even those of us here on BP.  Good luck!

Originally posted by @David Powers :

I have one LLC per property and I don't find it to be a nightmare (although I am a CPA). Each LLC has its own bank account and I find that compartmentalizing each property keeps me organized and allows me to analyze the performance of each investment in more detail.

I am still not clear as to why you would want a third LLC to manage the other two though. I don't see any real purpose for this entity.

David, it would be a nightmare if you had more than 1 property. I am a CPA as well and like it or not, there is not that much to analyze on each house. Now if you are talking large multi-s, then not as bad an idea.

My wife would not work for me if I had 50+ bank accounts. one for each property. With Quickbooks we get a P & L for each property.

Originally posted by @Arlan Potter :
Originally posted by @David Powers:

I have one LLC per property and I don't find it to be a nightmare (although I am a CPA). Each LLC has its own bank account and I find that compartmentalizing each property keeps me organized and allows me to analyze the performance of each investment in more detail.

I am still not clear as to why you would want a third LLC to manage the other two though. I don't see any real purpose for this entity.

David, it would be a nightmare if you had more than 1 property. I am a CPA as well and like it or not, there is not that much to analyze on each house. Now if you are talking large multi-s, then not as bad an idea.

My wife would not work for me if I had 50+ bank accounts. one for each property. With Quickbooks we get a P & L for each property.

I have 13 properties and each has it's own Quickbooks file and bank account.  The setup works well for me and I'm very happy with it.  It's not for everyone though.

Will you continue that method when you have 60 rental houses?

It just seems to me to be overkill.

Whatever works.

@David Roberts  I think you need to do a bit more research about financial operations prior to being worried about a legal entity. It just seems backwards to me that you are concerned with how to structure your business but you don't know what a P&L is.

Regardless, I'd like to offer my two cents. I'm going to agree and say that you shouldn't put your properties into an LLC. Aside from the (sometimes hefty) costs associated with starting and operating an LLC, they may not provide you with the asset protection you think you have. Rather, you should consider setting up a separate LLC that partakes in property management activities and have it handle everything involving the flow of money and tenant management.

The problem with putting each property into an LLC is that each LLC must operate as a separate business from the others. Any co-mingling of funds can result in loss of protection through "piercing the corporate veil." This means you can't mismanage your LLCs AT ALL.

As a means of protecting both your personal assets as well as your equity in the rental properties, you may want to set up a separate LLC to serve as the property manager for your properties. It would be responsible for collecting rent, paying bills, and maintaining repair of the properties, etc. Importantly though, it would bear the potential liability to any tenants, etc. rather than you personally or whatever entity that actually owns the real estate. This way, you have a clear business operating and should something go wrong you will still be able to protect all of your assets.

A P&L is a Profit and Loss Report that gives you what your Income is, less expenses totaling your bottom line.

When you have an LLC you need to set up that company as an individual company in QuickBooks.

Usually landlords don't carry an LLC and if they do, they perhaps put 5 properties per LLC. It is a suing society and since you are a CPA, I understand your concern, because they can go after everything you own personally, if you don't have an LLC.

However, to help you out some, you can setup QuickBooks this way, so that you don't have a ton of bank accounts.  

Setup your properties as a class.  If you are a  property manager you can setup your owners first and list their rental units as a subclass.  If you are a landlord just setup all your rental properties as a class.

      

This way when you receive rent you can apply that payment to the correct property by clicking on the class field in your forms that you fill out.  

You can apply that expense to that particular property, and if it's an apartment building you can apply it to the unit or the building itself. 

When you do a Profit and Loss Report by Class, you are given a detailed accounting of how much money each rental home or rental unit has made you. 

If you have an expense, it will tell how much it cost you to fix the building, or a particular unit inside the building. 

Classes are landlord's best friend.

Nancy Neville


I think @Brian Burke said it best. You could set up these multiple LLCs, but you should analyze the cost and administrative burden. Large institutional investors will always set-up separate single member LLCs for numerous reasons - asset and bankruptcy protection, different equity partners are involved, and because their lenders will require that each entity be a single purpose entity. However, depending upon the size of the deal, it may not always make sense. Take a look at how much it costs to create the LLC, maintain it every year, pay to have an agent (it might be $500/yr per entity) and then decide if it's worth it. On the liability side, I agree that insurance can probably be your best friend.

In Michigan if I'm the only member it is 50 to start and 25 to maintain I believe.  Not bad.  

I just want to do the smartest thing.  I don't know what that is.  I only know what I've heard from others, and what my lawyer advised.  But, lawyers want to make money too so their advice should be considered as such I suppose.

My lawyer wants 300 per LLC to do it for me, but I think it is very simple for me to set one up, especially if I'm not having any partners.

I would talk to a lawyer but I would think you would have one LLC be the Managing Member of the two other LLC's. However, I don't think this is necessary. As the others have stated, having the proper amount of insurance is more important. I hold my property in a single person LLC and use Intuit's Property Manager and find I am way more organized. I also was sued and at the end of the day it is the insurance company that hires the lawyers and pays the settlement. I would also say that if you go the LLC route, it is not the set up that you have to worry about it is adhering to the formalities of the corporation. A lot of people worry about the piercing of the corporate veil but that was never an issue in the suit.

I did talk to a lawyer.

So, I am new to the world of real estate as a business, and therefore I am not comfortable arguing one way or the other with anyone in here that's posted.  Some of you are very well established in this arena.  So, it leaves me wondering what is correct, or if all ways work and some are more expensive than others.

My attorney suggested having 1 property per LLC to protect one house from the other. She then suggested I could have 1 LLC own all other LLCs. But, everyone has their own agenda. My attorney requires 300 per LLC to set them up. I can set them up on my own for 50 in Michigan, however when it comes to law I get very nervous. Too many areas to get caught.

Having 50 LLCs created by an attorny is a lot of money. I have 1 rental without an LLC now, and is under my living trust. For future property, i was at least thinking to make 1 LLC per property.

I really don't know what is best, given all of the suggestions in this thread, my attorney telling me something else, other investors telling me other things...

I suppose further education is a must.

Talk to someone who is not trying to make money off of you - like your lawyer, or the LLC gurus. Talk to someone with knowledge but no vested interest. Someone or several people with 20, 40, 80, 200 rental properties.

I think you will find that most investors start buying properties, and then when they get a bunch, they start thinking about segregating some off into different groups(Trusts, LLCs, SDIRAs). Partly for protection, partly for inheritance issues, partly for retirement issues.

Go buy a bunch and then worry about protecting them or dividing the empire.

PS I would talk to another attorney as well. And a good CPA

who isn't out there trying to make money off of me? Lol

Hi @David Roberts  

In Indiana I have setup up an LLC (umbrella company) and put other companies under it with DBA -(doing business as). I believe you can you can setup as many DBA as you want. Check your state for more information.

I would ask her how to follow the formalities and for one operating agreement. Then set them up yourself. Only one LLC per property.

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