Separate LLC vs One LLC

48 Replies

Trying to find an article about putting each rental property into a separate LLCs or putting a group of rental properties into one LLC.

Just looking for pros/cons of each approach.  I've heard there are differing opinions from a legal and tax side.

I know this has probably been discussed ad nauseum so a link to a forum discussion or a formal article/blog post.

Thanks

@Alan Davidson , Yes you can just search here. 

IT really depends on your risk tolerance. you can go crazy with one per LLC or everyone in one LLC or somewhere in the middle.

Separating based on risk, $ value, location, type of property makes sense to me.  Sometimes the lender prefers one property per LLC. 

There is no tax benefit from separating. If the LLCs are multimember, you will incur more tax preparation cost for each MMLLC that files as partnerships or S-crop. 

Sometimes, LLC is not even necessary.

Talking to an attorney about your RE investing goals and your life outside RE (other Businesses)  will provide the clear picture on what extent you need to go. 

Good luck man. 

Another question should be asked is the tax benefit of one per LLC vs. multiple in one LLC?
@Alan Davidson If it's out of state rental the LLC must be created in that state. If you buy everywhere that narrows your choices. Like mentioned above it's based on your risk tolerant. If you have 500k of equity among 4 houses and you put them in 1 LLC 1 law suit and it's all gone. Also theres huge benefit in term of taxes, the more LLC you have the more you spend the more expenses you right off. Theres also a better and common way to protecting your asset by having a parent LLC from Wyoming or Nevada owning all of your LLC, reason for that is those 2 states have tougher laws to penatrate during a lawsuit, but dont quote me on it.
Another question should be asked is the tax benefit of one per LLC vs. multiple in one LLC?

@Kevin Ngo there is no tax benefit. There will be a higher operating costs for multiple LLCs. 

@Alan Davidson There is a cost to running and maintaining each LLC. This will in part depend on the state you are in. Some states the annual fees are very inexpensive some like CA I believe is $1,000 a year. MD is $300 a year. In addition to these costs you have the cost of accounting and separate tax returns, separate bank accounts and the time spent to keep everything else separate.

I think dividing up your assets among multiple LLCs is a good idea, but I think one LLC per property is excessive. (Unless you talking about a large commercial property.)

@Alan Davidson

Creating LLCs for rental properties makes NO difference on taxes - whether you have no LLCs, one LLC, multiple LLCs or Series LLCs (an interesting variation allowed by some states).

The main purpose of creating LLCs is legal liability protection. Unfortunately, there is no consensus and never will be. If you ask 3 attorneys, you will get (at least) 3 different opinions. But you do have to ask an attorney, because opinions of non-attorneys (including myself) when it comes to legal protection are worthless. Just like medical advice from non-doctors.

Originally posted by @Kevin Ngo :
Another question should be asked is the tax benefit of one per LLC vs. multiple in one LLC?

Single 👦 member LLC there isn't a benefit.

For tax purpose all Llc income and expenses go on your personal tax return. 

Thanks for all of you responses.

About being sued.  Wouldn't the insure you carry on each rental property cover a lawsuit?

LLCs are about asset protection as everyone said. Insurance would usually cover most lawsuits and in that case do you really need the LLC? The only time the umbrella policy wouldn't cover you is a catastrophic accident that you are judged to be liable for such as driving drunk and killing a brain surgeon. But if a tenant slips and falls and hires some ambulance chaser lawyer, most likely they will just go after the insurance money. If the lawyer is super zealous and nothing is protected by LLCs, he may decide it is worth going after more. LLCs are just another form of insurance. You have to decide your risk tolerance if you even want the LLC and then how many assets to put in each.

IN my mind this all boils down to what kind of assets you have … if your just have vanilla rentals and your not a slumlord what is your risk.. and insurance is far more important than how you hold title.

most people have never been in litigation .. so for some reason they just think hey your sued and going to end up in court.. it is extremely rare for anyone to end up in court.. there just is not that amount of liability renting out little pink houses to renters.. 

but irrevocable trusts I believe offer protection and same with charitable remainder trusts.. but just having LLC no matter where its formed.. the opposing council will sue you personally that I can flat guarantee.. they wont say HEY this guy is smart he has multiple entities so we cant sue him or her.. NO he will sue all the entities and you and usually our wife personally.. then you will spend thousands in motions in liminee and still probably not win since its going to be apparent those are your assets..

Not to mention as @Ned Carey   the cost of maintaining all these correctly becomes a drag on your cash flow.  Where this all makes sense is when you have multi members.. 

When we build our housing subdivisions we cant put all 30 houses in separate LLCs  we have one.... but what we do have is we pay 30k for a 10 year 1 million dollar liability policy so if we get sued we have the first million in legal fees for someone to go through before they get to our regular policy and then there is our general business umbrella for another monsters amount that is very cheap and you don't need to do anything but pay the fees annually.. 

@Kevin Ngo

As many above iterated--LLCs are generally not tax shelters they are for asset protection. 

@Alan Davidson you would hope the insurance would cover it. Insurance companies are good at getting out of paying but also in our litigious society it protects against when insurance isn't enough or isn't covered. 

To me LLC almost a fashion statement, I had rental property long before LLC's became the rage, and I will continue to have rentals after the fashion is over. Cuffs on trousers. ;

Originally posted by @Jay Hinrichs :

IN my mind this all boils down to what kind of assets you have … 

Bingo. For me it completely depends on the asset type. Little houses with debt? No way. You are now subject to commercial loans. A commercial asset (5+ unit multi, strip mall, office, industrial, MHP, self-storage) yes, separate ones depending on asset value. I like to keep max of $1M per so I can avoid sch l &m, but $2M tops per LLC if combining.

What type of 'rental property' are we talking about? Funny how the askers of LLC or not don't say what they're buying...

This post has been removed.

Originally posted by @Steve Vaughan :
Originally posted by @Jay Hinrichs:

IN my mind this all boils down to what kind of assets you have … 

Bingo. For me it completely depends on the asset type. Little houses with debt? No way. You are now subject to commercial loans. A commercial asset (5+ unit multi, strip mall, office, industrial, MHP, self-storage) yes, separate ones depending on asset value. I like to keep max of $1M per so I can avoid sch l &m, but $2M tops per LLC if combining.

What type of 'rental property' are we talking about? Funny how the askers of LLC or not don't say what they're buying...

 they also get the cart far before the horse .  if your starting out and buying a rental or two with 20% down in fly over land you may have a whopping 50k to try to protect NO one is going to sue for that little of equity.. non starter.. why spend  thousands protecting against something that will never happen.. you can buy a 100k umbrella policy for probably 100 a year or so.. turn it over to them.

and a lender with 1 to 10 loans govmit back wont make a loan to your llc anyway.. now if you doing HML its almost mandatory that you have an LLC in many states.. as its a dodd frank issue of clearly denoting business purposes loans.

@Alan Davidson You should also look into this threadhttps://www.biggerpockets.com/forums/51/topics/592....

You should look into Series-LLC and see if that's an option for you - then you don't need to worry about this question, as you can place a property in its own children Series-LLC that you can form when needed.

As for distribution, you can have one or more per LLC, and that depends on multiple factors:

- property class - you might not want to mix A class property with a D class property in the same LLC, due to different tenant level

- cash flow - you might want to keep your cash flow cow separate from the ones that barely produce

- equity - you might want to keep the one with large equity in its own LLC while you can group the ones with little equity in another LLC (let's say you have one with 50K equity in its own LLC and 3 other each with only 10K in another LLC, till their equity grows to your risk threshold when you move them out in their own LLC).

- number of units (in the case of MF)

- location of real estate

The investor has to decide what mix is optimal for their situation.

@Jay Hinrichs you often point out the difference between how things are done out west vs in the east. One issue here, Certainly in Baltimore, is lead paint. While you may not have much in the way of assets to protect now, one house with lead paint can wipe you out. Not just wipe out what you have now but wipe out what you might accumulate in the next 10,15 or even 20 years. 

In MD the statute of limitations does not start until a child reaches the age of majority ie. 18. So he or she has until they are 21 in order to sue you over lead paint poisoning. 

To add to what Jay and @Steve Vaughan says how you structure and manage your LLC makes a big difference. If you are a single member LLC and you run over a little old lady while delivering material for the company, both you as the driver and the LLC as your employer are liable. The LLC won't help you squat in that situation.

Now expand that to You screen the tenant. You chose what repairs to do and not to do, You choose who does those repairs, You chose the management company. That is a lot of YOU even though you have an LLC

Originally posted by @Ned Carey :

@Jay Hinrichs you often point out the difference between how things are done out west vs in the east. One issue here, Certainly in Baltimore, is lead paint. While you may not have much in the way of assets to protect now, one house with lead paint can wipe you out. Not just wipe out what you have now but wipe out what you might accumulate in the next 10,15 or even 20 years. 

In MD the statute of limitations does not start until a child reaches the age of majority ie. 18. So he or she has until they are 21 in order to sue you over lead paint poisoning. 

To add to what Jay and @Steve Vaughan says how you structure and manage your LLC makes a big difference. If you are a single member LLC and you run over a little old lady while delivering material for the company, both you as the driver and the LLC as your employer are liable. The LLC won't help you squat in that situation.

Now expand that to You screen the tenant. You chose what repairs to do and not to do, You choose who does those repairs, You chose the management company. That is a lot of YOU even though you have an LLC

we have lead paint rules.... we have to mitigate lead paint before we rehab old houses and the other one is asbesto's I got tagged for a 35k fine and remediation on that one  LOL.. so I get lead paint inspection and asbestos before we start.

I did see that American greed show were the land lord did nothing about lead paint and the child ate the chips and died.. and I believe he got PERSONALLY criminally indicted I don't think any asset protection was going to save him there.. 

But point well taken.. at the end of the day they are still going to sue you personally and you better have good insurance sounds like to me.. the LLC is not going to keep opposing council from suing you.. the way around this is simply don't buy those kind of assets.

From a Tax & Accounting perspective it will help simplify things in the long run if properties are under different legal entities. In the short term it doesn’t matter as much and is primarily going to be based on the amount of risk you’re willing to take on. For larger multi family properties you are going to want to establish separate LLC’s.

Is it a good idea to put my $1,000,000.99 AAPL worth of stock in its own Llc.   It would be untouchable if I killed a bunch of race 🐴 S driving drunk?

Originally posted by @Costin I.:

@Alan Davidson You should also look into this threadhttps://www.biggerpockets.com/forums/51/topics/592....

You should look into Series-LLC and see if that's an option for you - then you don't need to worry about this question, as you can place a property in its own children Series-LLC that you can form when needed.

As for distribution, you can have one or more per LLC, and that depends on multiple factors:

- property class - you might not want to mix A class property with a D class property in the same LLC, due to different tenant level

- cash flow - you might want to keep your cash flow cow separate from the ones that barely produce

- equity - you might want to keep the one with large equity in its own LLC while you can group the ones with little equity in another LLC (let's say you have one with 50K equity in its own LLC and 3 other each with only 10K in another LLC, till their equity grows to your risk threshold when you move them out in their own LLC).

- number of units (in the case of MF)

- location of real estate

The investor has to decide what mix is optimal for their situation.

During a conversation with an attorney a few months back, series LLCs came up. He said there is a case right now in bankruptcy court where (if I remember correctly) one of the child LLCs lost a huge lawsuit, then filed bankruptcy. The bk court (federal) said that because federal law doesn't recognize this arrangement, the whole series should be treated as a single-entity and all assets/liabilities of all should be joined. Also, only a limited number of states have series LLCs.

My understanding of what is the most protective arrangement, for those who have the level of wealth that needs this amount of protection, is to put the property in a trust with a separate LLC as beneficiary.

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