Single member llc or multi member llc for asset protection

16 Replies

I’m in the works go setting up an llc for fix and flips for asset protection, up till this point Ive been set on doing a single member llc since I wont have any partners. I’ve been reading Loopholes of Real Estate and got worried when I heard a few states (like Florida) can still go after the owner in a lawsuit against the entity in a smllc since they see it as only one persons asset. Can someone shed some light on this, more specifically in Illinois? Would it be better to add someone to the business, I know I’d get taxed harder and have to have workers comp so that’s why I’m trying to avoid going that route. Thanks in advance

@Brandon Reda

Multi gives you more options but you have a partner. Run it correctly and both should provide a sufficient veil of protection. 

@Brandon Reda an LLC is a flow through entity which means the profit is taxed at your personal level, so that isnt going to change if a partner joins. The protection you receive is based on the liability you have with the property. That being said, im not sure what type of lawsuits you would personally be worried about?

Thanks for the replies. That’s all what I’d be assuming, what I read was about something other than real estate, basically a guy who committed credit card fraud in florida got sued and thought he was safe because he held everything in an LLC, but the court ruled since it was just a single member LLC and not a partnership they went after his personal assets. And is the profit still taxed at a personal level if I choose to be taxed as an scorp? Not that I’m planning on doing anything “illegal” but I do plan to have slight risk in the sense I know a lot of handymen/sub contractors employees through my line of work that would do “side work” not thru their company. Just in case someone gets hurt on the job, or a nosey neighbor gets hurt and hypothetIcally insurance isn’t enough to cover it is there any way they could come after my personal assets?
Originally posted by @Brandon Reda :
Thanks for the replies. That’s all what I’d be assuming, what I read was about something other than real estate, basically a guy who committed credit card fraud in florida got sued and thought he was safe because he held everything in an LLC, but the court ruled since it was just a single member LLC and not a partnership they went after his personal assets. And is the profit still taxed at a personal level if I choose to be taxed as an scorp? Not that I’m planning on doing anything “illegal” but I do plan to have slight risk in the sense I know a lot of handymen/sub contractors employees through my line of work that would do “side work” not thru their company. Just in case someone gets hurt on the job, or a nosey neighbor gets hurt and hypothetIcally insurance isn’t enough to cover it is there any way they could come after my personal assets?

Generally LLC, both single member or multimember, never protect you from fraud or gross negligence.

However, if it is a business accident and stuff, LLC should be fine. If you talk to an attorney, they might suggest having a 100% owned S-corp own LLC and run flips via LLC to have an extra layer of protection. But, to beginners, the expenses of maintaining these entities added up really quick.  If you just have one entity and Follow all the necessary steps to protect to not pierce the corporate veil, you should be fine. As you scale up and cost of having little more layer of the entities is feasible, you can always add more protection. 

Its all about peace of mind, if this is keeping you up at night, maybe talking to an attorney and get the robust advice. 

The very best course I have seen on estate planning, asset protection and trusts (other than land trusts) is by Lee Phillips. We can put you in touch with him if you send me a PM. 

Best book you should read: "Lawyers are Liars" by Mark J. Kohler.

Now to your question. The annual income tax return for a multi member LLC is DUE March 15th. The late filing fee is $195.00 PER month PER Partner. 2 partners 6 months late the fee is 12 times $195.00 or $2,340.00. You must file a return EVEN if you made no investments or profits. A Zero return must be filed.

A single member LLC can be treated as a small business and be added to your personal return with "Schedule C". You can avoid the multi member late filing penalty by doing this.

The other members of an LLC are not employees. They are all partners who can take independent actions that may not align with your desires. Why would you want a partner? They can do something stupid and get you sued for everything your LLC owns.

Partners have decision making ability. Avoid partners at all costs. Hire mentors, get an education but avoid partners. Everyone I know who took a partner in Real Estate investing has ended up with financial and legal issues. Many who were friends before the partnership are no longer speaking to each other. You don't need that kind of drama or stress in your life.

Employees are not partners and cannot be members of your LLC. Employees create stress. You need to file income tax withholding forms. Depending on the size of your payroll this can be annually or quarterly or even monthly, Now you need to pay for an accountant. The other thing about employees is you need to buy insurance to cover their stupidity. Liability insurance is reasonably priced. Worker's Compensation Insurance is through the roof. Are you going to offer medical and dental?

When attending real estate investing seminars do not get conned into buying an out of state LLC. They charge up to $6,000 and promise you the state such as Nevada has no state income tax. That is actually true. What they don't tell you is that you will need to pay an annual franchise tax to maintain the Nevada LLC PLUS pay a registered agent. They also fail to mention that your business will be required to register and file as a foreign entity here in Illinois and still have to pay income tax to the state of Illinois as a foreign entity.

When you flip a home the profit on the sale must be dealt with in the LLC It is not your personal slush fund. Follow the rules or deal with the IRS. You may also incur additional legal fees when making the sale since the LLC is not a person. The title company may just be smart enough to demand you have an attorney present at the closing. Just like you cannot represent your LLC or corporation in court you should not represent it at closing.

Here is a better and less expensive or messy solution:

You live in Illinois the Birthplace of the Land Trust. Place your personal residence in a land trust. Make yourself and your family the beneficiaries or the "Beneficial Interest". Choose a trustee you can depend on. The trustee can be a business you own. Even a DBA sole proprietorship with ZERO assets can be your trustee. Place your vehicles, furniture, jewelry, other personal property and even your check books into personal property trusts.

When you buy  a property to flip, purchase it in a land trust. Instead of buying an insanely expensive workers comp policy for you and your partners you should instead buy a million dollar liability policy and a million dollar Commercial Umbrella for you business entity. You know which one, the entity with no assets. Hire only subcontractors who have their own liability and work comp insurance.

At closing after the flip, the assets are distributed to the beneficial interests of the trust as directed by the TRUSTEE. You tell the trustee what to do in a letter of direction.

Your best course of action is to own nothing in your own name. Set up a land trust for your personal residence and pay rent to the trust for the privilege of living there. Use that rent to cover the mortgage, real estate taxes, insurance and maintenance. Talk to the person who prepares your income tax return about how to set this up properly. The trust can have its own tax id number.

Full disclosure: I am not an attorney, nor do I play one on television. Always seek competent legal advice on any contracts, documents, asset protection strategies or estate planning ideas. If you do not have an attorney let me know and I can point you in the right direction.

Great responses, thank you. I will for sure have an attorney representing my LLC when I get down to the nitty gritty, I just wanted to have a solid base before I’m influenced too greatly by just his opionions. I have read a lot about land trusts and once I get bigger, and especially once I get in to rentals, I am planning on transferring title of my personal residence/assets to a trust. In regards to forming th LLC out of state, I understand having the name in a place like Nevada would be costly being a foreign entity, but I read a way to cut costs would be to hold the company in Whyoming, since they are able to do work in Illinois but instead of paying a $500 filing fee each year for Illinois they only have a $50 filing fee. Would that just overly complicate everything just to save a few bucks?
@Brandon Reda The internal protection of LLC is the same in all states and does not differ from single to multi member llc. The outside protection however is different in each state. In Florida the charging order was the sole remedy for both single and multi members llc until that famous Olmsted vs FTC case that removed that protection for single member LLC. The way to get around it is to have the single member LLC owned by a WY or NV LLC that will give you that outside charging order protection. In your case, I don’t know what Illinois LLC outside protection strengths are. If they are not strong, i would suggest to look at the same strategy of WY or NV holding LLC.

Why pay the cost to transfer title twice. Choose a land trust the first time. It is very hard to get a bank to change title to a financed property to a trust after the loan is in place. 

You will still need to file an Illinois income tax return.

Originally posted by @George Skidis :

The very best course I have seen on estate planning, asset protection and trusts (other than land trusts) is by Lee Phillips. We can put you in touch with him if you send me a PM. 

Best book you should read: "Lawyers are Liars" by Mark J. Kohler.

Now to your question. The annual income tax return for a multi member LLC is DUE March 15th. The late filing fee is $195.00 PER month PER Partner. 2 partners 6 months late the fee is 12 times $195.00 or $2,340.00. You must file a return EVEN if you made no investments or profits. A Zero return must be filed.

A single member LLC can be treated as a small business and be added to your personal return with "Schedule C". You can avoid the multi member late filing penalty by doing this.

The other members of an LLC are not employees. They are all partners who can take independent actions that may not align with your desires. Why would you want a partner? They can do something stupid and get you sued for everything your LLC owns.

Partners have decision making ability. Avoid partners at all costs. Hire mentors, get an education but avoid partners. Everyone I know who took a partner in Real Estate investing has ended up with financial and legal issues. Many who were friends before the partnership are no longer speaking to each other. You don't need that kind of drama or stress in your life.

Employees are not partners and cannot be members of your LLC. Employees create stress. You need to file income tax withholding forms. Depending on the size of your payroll this can be annually or quarterly or even monthly, Now you need to pay for an accountant. The other thing about employees is you need to buy insurance to cover their stupidity. Liability insurance is reasonably priced. Worker's Compensation Insurance is through the roof. Are you going to offer medical and dental?

When attending real estate investing seminars do not get conned into buying an out of state LLC. They charge up to $6,000 and promise you the state such as Nevada has no state income tax. That is actually true. What they don't tell you is that you will need to pay an annual franchise tax to maintain the Nevada LLC PLUS pay a registered agent. They also fail to mention that your business will be required to register and file as a foreign entity here in Illinois and still have to pay income tax to the state of Illinois as a foreign entity.

When you flip a home the profit on the sale must be dealt with in the LLC It is not your personal slush fund. Follow the rules or deal with the IRS. You may also incur additional legal fees when making the sale since the LLC is not a person. The title company may just be smart enough to demand you have an attorney present at the closing. Just like you cannot represent your LLC or corporation in court you should not represent it at closing.

Here is a better and less expensive or messy solution:

You live in Illinois the Birthplace of the Land Trust. Place your personal residence in a land trust. Make yourself and your family the beneficiaries or the "Beneficial Interest". Choose a trustee you can depend on. The trustee can be a business you own. Even a DBA sole proprietorship with ZERO assets can be your trustee. Place your vehicles, furniture, jewelry, other personal property and even your check books into personal property trusts.

When you buy  a property to flip, purchase it in a land trust. Instead of buying an insanely expensive workers comp policy for you and your partners you should instead buy a million dollar liability policy and a million dollar Commercial Umbrella for you business entity. You know which one, the entity with no assets. Hire only subcontractors who have their own liability and work comp insurance.

At closing after the flip, the assets are distributed to the beneficial interests of the trust as directed by the TRUSTEE. You tell the trustee what to do in a letter of direction.

Your best course of action is to own nothing in your own name. Set up a land trust for your personal residence and pay rent to the trust for the privilege of living there. Use that rent to cover the mortgage, real estate taxes, insurance and maintenance. Talk to the person who prepares your income tax return about how to set this up properly. The trust can have its own tax id number.

Full disclosure: I am not an attorney, nor do I play one on television. Always seek competent legal advice on any contracts, documents, asset protection strategies or estate planning ideas. If you do not have an attorney let me know and I can point you in the right direction.

Woah, you shed some light on something I had no clue about, I am intrigued. 

Originally posted by @George Skidis :

Your best course of action is to own nothing in your own name. Set up a land trust for your personal residence and pay rent to the trust for the privilege of living there. Use that rent to cover the mortgage, real estate taxes, insurance and maintenance.

It would not be appropriate in most state to put your personal residence in a land trusts as you could be losing your homestead protection and also may be loosing some property tax cap limit on homestead residence.

I do however agree on the land trust strategy for all other real estate property that you own. However, in most state (except Florida), land trust is not an asset protection tool but only an anonymity tool. It is also a good way to avoid the due on sale clause accelerating a mortgage. If you couple the land trust with an LLC as the beneficiary you get the best of both world: asset protection and anonymity.

Originally posted by @Mike S. :
Originally posted by @George Skidis:

Your best course of action is to own nothing in your own name. Set up a land trust for your personal residence and pay rent to the trust for the privilege of living there. Use that rent to cover the mortgage, real estate taxes, insurance and maintenance.

It would not be appropriate in most state to put your personal residence in a land trusts as you could be losing your homestead protection and also may be loosing some property tax cap limit on homestead residence.

 Mike: We have lived in two counties in Illinois and never had that problem. You need to take the trust to the tax office, prove the beneficial interest and that's it. 

@Brandon Reda Everyone has offered a lot of great advice in regards to asset protection. I'll respond to your concern with the lawsuit. I would have to read the case, but a big part of piercing the corporate veil likely resulted from the fraud the defendant committed. You cannot expect to commit fraud, especially if done within the LLC, and expect it to shield you personally.

Take the time to make sure you are using your LLC or any other entity to its fullest capacity. When an attorney attempts to pierce the corporate veil, its very rarely comes down to one issue. The attorney and the Court will take into account a variety of factors to establish if you have a functioning entity or if the entity should be disregarded. It should be noted that Courts rarely allow piercing the corporate veil, but it has happened. Is it filed with the state, do you have an EIN, does the business have a bank account, are funds in the bank account commingled with funds from other businesses or personal funds, (to a lesser extent) does the business have its own phone number or office? Generally I tell clients, if you treat your LLC or S Corp like a functioning business and set it up to be a functioning business, you'll have the benefit of the corporate veil.

@Brandon Reda Land trusts offer anonymity, but no legal protection. And if you do flipping, you might want to make the LLC dormant (or look into Series-LLC if that's an option for you). Why? If when you sell your flip, you put in your ad "New Plumbing", but you only changed the faucets and shower hardware, you just committed fraud. If the buyer comes years after with a lawsuit, he can threaten your LLC and the X flips you are doing in it at that time. My 2¢, not a lawyer, due diligence required.

Originally posted by @Costin I. :

@Brandon Reda And if you do flipping, you might want to make the LLC dormant

Costin, why would you want to make your LLC dormant? Wouldn't it be better to just dissolve it after the flip. Then there is no one to come back after in case of law suit years later.

I don't remember the exact justification (and I'm not a lawyer), but it has something to do with the idea of liability being contained within the LLC box. If you dissolve it, it exposes/passed to you in case a buyer coming back "angry" at you. Let me know if is better to dissolve it (beside not having to deal with the paperwork).

Updated almost 3 years ago

In Sum, if the purpose of the LLC has legitimately come to an end, and there aren’t any known/present creditors, then depending on the laws in your state and your situation, you may decide either to (a) keep the LLC open until, for example, the statute of limitations runs out, or (b) shut down the LLC so long as it was in existence and in good standing during the time in which the business had operations. If you dissolve the LLC when there are known/present creditors, the members of the LLC will generally be liable for amounts distributed from the LLC to the owners. (from https://kkoslawyers.com/owners-liability-after-your-llc-is-closed-or-dissolved/)