Structuring Entities (LLCs) with an Operating Company

11 Replies

I've heard on the BP Podcast and several other investors mention they have holding LLCs for their rentals, a holding LLC for their flips, and an operating LLC that manages everything.

I'm just curious how this works, especially in regards to the flow of money. If anyone has this type of setup and would like to share how it runs, I would appreciate the info.

For example, does the operating LLC own the other holding LLCs or are they owned by you?

What does the flow of money look like when you purchase a new flip? I'm assuming the money would come from the operating company but the property would be titled to the holding LLC. Then renovation money would come from the operating LLC. But doesn't this defeat the purpose of the separation of assets if you're going to co-mingle everything?

That does sound confusing. I would have a different LLC for business types (one for buy and holds, a different one for flips) and an S-corp that manages my buy and holds. All rents go to the s-corp. The flip business would be stand alone and don't have a mgt co. Hope this helps. I wouldn't go establishing a bunch of confusingly-structured entities in the name of 'sophistication'.

The purpose of a different managing company is so that the holding LLCs can keep changing without having to change bank accounts, marketing materials, etc. The lawyer I was speaking with today advised that the LLC holding companies for the flips be allowed to expire after a dozen or so flips are run through them.

I didn't get a chance to ask him about the money flow. I know the lawyer who was on the BP Podcast recommended setting things up this way, and I've heard other investors in the past say they do it. I'm just curious how it works exactly.

Excellent question @Matthew B. I am guessing the reason for having the operating LLC above both the buy and Hold LLC and flip LLC is because he wants to have one bank account/credit card to handle all the expenses from, at least thats my reason. I don't want to have to carry a separate CC for each type of business, i rather use one CC for all marketing, networking, dinners etc and then allocate those expenses to the underlying entity/investment afterwards for simplicity sake.

I currently have several buy/holds under my invest LLC which subsequently is one of the members of the LLC for each individual property (i own the properties with multiple partners) and i have a checking account and CC for that investment LLC. However, now that i am expanding my rehab business i want a separate LLC for those projects but i don't want multiple credit cards (multiple checking accounts might ultimately be required) hence why the idea of a master/operating LLC sounds appealing. I haven't done this yet either so i would be really curious to know if that's how most people set their business up

@Matt Lane

This is what Scott Smith, the attorney featured on BP Podcast Show 109, said:

"Action #2 is to say for most investors, go ahead and set up at least three LLCs or start using a series LLC structure. You should be having one company that’s going to hold your flips, one company that’s going to be holding your buying holds, and one operating company that you’re going to be used to enter into contracts, to purchase property, collect rent, etc. Your operating company is the one that’s actually performing all the business. The holding companies don’t do anything besides just holding the assets and we separate those out for IRS tax reasons."

I'm gonna go post on the show notes and see if I can get some clarification from Mr. Smith.

Irs allows you to treat a single member LLC as a "disregarded entity" basically you get the liability protection of an LLC but you can file your taxes on schedule E like you own it personally. You can also elect to treat LLC as an s-corp but you would have to treat it as a separate company and file an 1120-s

@Matt Lane

I'm thinking the LLC's are setup with the operating LLC being listed as the owner of the holding LLC's (instead of you personally), so any money made, whether rent or flip revenue, flows back to the bank account of the operating LLC. The operating LLC has the bank accounts, credit cards, marketing, etc. and new holding LLC's can be created as needed without changing the operating LLC.

Hopefully someone can confirm this or set me straight. 

I'm not necessarily looking for asset protection, but a simplified way of doing business. I currently have an LLC for buy and holds and an LLC for flips. I have separate bank accounts for each and separate Quickbooks accounts. If I could combine them using an operating company, I feel like it would make my life easier and reduce some expenses.

@Matthew B. That's what I was trying to say but not nearly as eloquently.  I hope that's the right way to go about it from a legal and accounting method because that's what I'm thinking about doing at the moment 

@Matthew B.

 So i spoke to an accounting firm a bunch of the people in the business use around here and this is what he suggested.

- 2 member operating LLC that everything flows up to

- Underlying LLCs will be owned by the operating LLC and yourself as the second member, but 100% of the profits flow to the operating LLC

He said checks for purchase/sale should come out of the underlying LLC ideally but he has clients where that doesn't always happen for a variety of reasons. Seemed to imply its not the end of the world if that happens from time to time.

He said you can use the operating LLC account and credit card to cover all other expenses which may not be applied to a specific underlying property, he suggested I get a corp credit card for this LLC as opposed to one for each.

He also said this structure is good if you ever look to get a mortgage on a property or bank loans in the future as there will always be one LLC (operating LLC) which will file a tax return and likely have income as opposed to several LLCs some of which profit one year and lose other years and are erratic. He claimed banks like the simplicity and transparency of a setup like this for analyzing everything when issuing a loan.

Not sure if this helps or if anyone else has any input but i'm likely going to proceed ahead with this unless i hear anything better

@Matt Lane

Makes sense to me! Thanks for sharing. 

Why the need for 2 members on all of the LLCs? Is that just as asset protection thing? I vaguely remember the attorney on the podcast mentioning it.

@Matthew B. i didnt ask but i remember hearing something in the past about LLCs with two members are usually better than an LLC with one, i believe its because you itemize your expenses on the LLC and then carry over the net profit or loss on to your personal tax return. When i setup my first llc for buy and hold properties my cpa at the time suggested it for that reason so i wouldn't have to itemize these expenses on my personal return since i likely would have a net loss due to depreciation and expenses. Best bet to confirm with your cpa before you set it up if you're concern

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