Should I create an LLC for my properties?
Darsh PatelPro Member
Boston, MA · Member since 2016 · 60 posts · 15 votesHi everyone,
I own a few small multi-family properties (8 units total) and I have heard that it is good to transfer rental properties over to an LLC ownership. I wanted to ask what would be the benefit of doing this? Also, how would I go about creating an LLC/transferring the properties over and how much would it cost?
I'm trying to figure out whether the cost of the LLC is worth doing it now or if I should wait until my portfolio gets bigger. Any help is appreciated! Thanks
Hey Darsh: Great question.
From an investors perspective based on growth not taxation or asset protection
If you want the best taxation advise talk to a good accountant or CPA.
Asset protection talk to a good attorney.
Where do put properties in your personal name, LLC or S corp is going to depend on your goals, asset protection, long terms planning.
If you are under 8 properties you can hold them in your personal name and insure them property with a additional umbrella coverage.
If you want to grow quickly then here is a plan we follow: Assuming you intent to scale to 25 properties.
For Rentals.
Each LLC or a Each series in the LLC holds 5-6 properties for asset segregation.
1-5 properties Personal Name - Then transfer to LLC or S Corp (S corp has some other advantage not getting it to that for this discussion)
6-25 Properties Buy directly in LLC (limiting 5 per llc)
Some people in the tread had suggested that 1 property per LLC. I don't think it makes sense because of the costs. I think a few properties per LLC makes more sense and will depends on your goal.
As far as insurance. We have 1 Million per property and Personal Umbrella of 4 time your net worth. So assuming you Total assets owned - Liabilities = 1 Million then we carry a 4 Million personal Umbrealla in addition to the insurance on each property.
See Examples Below on the setup .
It does NOT matter that the business is in Texas, it does NOT matter that the properties are in Texas, if YOU live in CA, you earn income and pay taxes here, then you owe the $800/LLC/yr CA state franchise tax. If you have not been paying it, they will find you and they will make you pay it. You need to consult a CPA immediately on this ... I believe that they will confirm that I am correct and you may owe years of back taxes.
This is incorrect. A California LLC must file and pay the minimum $800 LLC fee only any one of the following apply:
If the owner of the LLC lives in California, he/she will have to pay CA income taxes on the income from the LLC even if the LLC is not organized or doing business in CA, but the LLC as a separate entity is not required to file a CA return unless it falls under one of the above.
However, and this may be what David is referring to, if the owner or any other members of the LLC conduct business on behalf of the LLC in California, then the LLC is determined to be "doing business" in California and therefore is required to file and pay the LLC fee.
It does NOT matter that the business is in Texas, it does NOT matter that the properties are in Texas, if YOU live in CA, you earn income and pay taxes here, then you owe the $800/LLC/yr CA state franchise tax. If you have not been paying it, they will find you and they will make you pay it. You need to consult a CPA immediately on this ... I believe that they will confirm that I am correct and you may owe years of back taxes.
This is incorrect. A California LLC must file and pay the minimum $800 LLC fee only any one of the following apply:
If the owner of the LLC lives in California, he/she will have to pay CA income taxes on the income from the LLC even if the LLC is not organized or doing business in CA, but the LLC as a separate entity is not required to file a CA return unless it falls under one of the above.
However, and this may be what David is referring to, if the owner or any other members of the LLC conduct business on behalf of the LLC in California, then the LLC is determined to be "doing business" in California and therefore is required to file and pay the LLC fee.
For reference, more details from a previous post on this very topic:
https://www.biggerpockets.com/forums/51/topics/204...
If you believe most of the posters, you owe $800/yr/LLC if you live in CA ... even if the LLC and/or properties are not in CA.
Very Very informative info everyone, definitely gave me more topics and angles to do some research upon. Thanks
Thank you! This is what i understand. You have a LLC, Company and Personal Insurance to mitigate the risk of what could be shifted to you. Does alot of this depend on how you structure the company and what level of personal risk or assessment is assigned by the court?
There has been a lot of discussion on this topic already, but I would like to reinforce that creating LLC's is very easy to do online at the state department of revenue or secretary of state for most states. Some are as low as $35 or $50. The tax benefits for using LLC's vs. putting on your personal tax return is not that great. As for the legal protection, you should consult an attorney. One issue somewhat mentioned is that title companies need all your LLC info for closings all the time and you also need to get the closing checks in the LLC name and will need to go to that bank account. This can lead to lack of flexibility to move funds around or deposit issues.
As for organizing your business reporting, Quick books is very capable of handling all of this and organizing properties under LLC's with classes and sub-classes. Then you can combine them all and report for 1 tax return.
Hope this helps!
Kevin Schulz
SOS Financials, specializing in real estate book keeping.
How much equity do some of you feel should be in each LLC? 1 million? 5 million? @Andrew Holmes @Steve B.
I am thinking about doing this once I hit 5 properties (because most commercial lenders like bundling that amount into one loan) and just move them all to one bank and create one LLC, then continue buying property and create a 2nd LLC when I have another 4-5 (obviously the equity will have to be considerably high).
your break-even point is:
(cost of LLC setup+ expense of additional administration)
----------------------------------------------------------------- = total equity to be held in LLC
(risk of lawsuit)
I have each property in its own LLC. Almost zero time involved other than setting up the LLC on the SoS website and getting an EIN. maybe 30 min. Then filing with the state each year (5 min per LLC. Also online).
I have 30 something LLCs but still manage out of one bank account (under the name of my management entity). All bills and income come to/from the management entity.
It ads no complexity. New LLC in Texas is $300. So that's the only cost. If you already have property and need to transfer them a title co will do it for $150/each or so.
I'm doing this on my phone so the full "why" is too long to type but for one, when I refinanced a bunch of properties with Freddie they needed them in their own LLCs.
Do you have to file taxes for each LLC? Or just the management one?
@Cody L. In Texas, as far as I know, even tho an llc can state in the SOS docs a perpetual existence, each year we have to have a registered agent to be active. So are you paying the registered agent x amount of dollars a year per llc to remain in good standing? The no tax threshold is, I think at $1.1M. At 30 different llc's even with an established relationship with a registered agent, renewal would be $3K a year or so.... Not sure what your avg gross amount is, but assuming $16K per property, your gross income would be $480K, slightly less than 1/2 of the tax threshold.... Is that enuff margin to grow from with 30 diferrent llc's in view of all that can go wrong in REI?
I remember when I developed mine. I thought about as managing member I could allow x amount of llcs to operate under my umbrella, but ultimately, I'd be responsible, rather my llc would be responsible for any f ups the non managing members did, because I accepted fees.
@Darsh Patel, the bigger your portfolio grows or your ambitions, create an llc within the laws of your state to protect your personal liability. Having many llcs in operation is a good thing, but IMHO, they should be separate from your own. The dominoe effect is a reality.
I register the LLCs myself. Takes less than 5 minutes, seriously, and that includes getting my EIN from the IRS.
Yes, each year you have to file your paperwork for each one. It takes me about 1-2 hours to do it for all my properties once a year. I do it online. Totally paperless and quick. If I had to do it more often I'd likely script the process and it would pull data from an XLS and submit it all for me but since it doesn't take long to manually do it (I'd say 5-6 min per LLC once a year) I haven't bothered to automate.
I have each property in its own LLC. Almost zero time involved other than setting up the LLC on the SoS website and getting an EIN. maybe 30 min. Then filing with the state each year (5 min per LLC. Also online).
I have 30 something LLCs but still manage out of one bank account (under the name of my management entity). All bills and income come to/from the management entity.
It ads no complexity. New LLC in Texas is $300. So that's the only cost. If you already have property and need to transfer them a title co will do it for $150/each or so.
I'm doing this on my phone so the full "why" is too long to type but for one, when I refinanced a bunch of properties with Freddie they needed them in their own LLCs.
Do you have to file taxes for each LLC? Or just the management one?
I don't file taxes for the LLCs. The IRS doesn't care that they're in an LLC. I only have one "Cody" return. Properties are on my personal taxes as if there were no LLCs involved. I believe the term is "disregarded entities" which is aptly named.
Maybe there is a better way but that's what my tax guy does.
Very insightful thread. I'm looking to start investing out of state and sounds like an umbrella policy will cover me initially. If I continue to grow, then I can explore starting LLCs (likely one holding and others in the state of the properties) - my question though, is how difficult will it be to transfer title to the LLC and retain the personal financing that was offered to me? In addition to each state transfer taxes, I've read there may be a due on sale clause. Another obstacle I just ran into when speaking with a bank is that I'm told my LLC would have to demonstrate 2 years history of sufficient income to qualify. Is there a good way to address these or do they just vary by bank?