LLC dos and don'ts

[Josue Velney]

Hi BP,

I currently invest in two different areas. One area has great cash flow the second has great appreciation value. My empire is grown vary fast. I currently have two LLC's. My question is when do you know if you need more than one LLC? Should I place my assets in the LLCs by investment locations or by property value amount? Example should I say once I have so much value and liability in one LLC move to the next one? Should I keep the two family units in one LLC and the 16 unit in the other? Thanks...

[Edward B.]

@Josue Velney,

It is totally a matter of preference and risk tolerance.

To answer your question, I prefer to do it by the amount of equity that I have in each LLC. I use the LLCs for liability protection so my goal is to minimize my exposure in each LLC, not some arbitrary number such as the number of properties. What sense does it make to only put 2 or 5 properties in each LLC if some have tens of thousands of dollars in equity and others have hundreds of thousands. So I would first look to balance the amount of equity in each.

Next I would look at the types and locations of the properties with an eye toward liability. Commercial vs residential, multi-family vs single family, A class vs C class, etc. That is, if one is more litigious, like your 16 unit probably is, I would try to keep it separate from less litigious properties such as SFHs. Or if you rent to people that are potentially more sue happy, like lawyers, I would try to keep those properties separate.

Ideally you would put every one into its own LLC but that really isn't practical, even with a Series LLC if that is an option for you, at the level of investing that most of us are doing. Remember, LLCs cost money to set up and maintain and time/effort to run correctly so you have to balance that against the benefit they provide. Is it worth it to separate millions of dollars of equity? I say yes. What about $25k of equity? Maybe not such a sure thing.

There are other benefits to having an LLC as well, though, that need to be factored in beyond just the asset protection aspect.