Establishing legal entity

8 Replies

Currently own three multifamily fourplexes (2 in Ohio, 1 in Missouri). Plan to continue to purchase more soon. Currently reside in Virginia.

Working on establishing a legal entity and spoke with one law/cpa firm. They recommended the following entities:

Create a WY LLC for your holding company. This will hold your safe assets, such as a savings account, mutual funds/stocks, precious metals, etc. This LLC is in WY for asset protection and privacy from outside liability. You can also use the WY LLC for a "friendly lien" against the equity in your rental properties.

Create a S-Corp for your real estate business in VA. This S-Corp will be used for management and tax reimbursement. This will allow you to take advance of 280A and 199A tax codes. Also you are able to reimburse for out of pocket expenses like medical expenses, home office expenses, property insurance.

Create 3 LLC(s) in 2 in OH and 1 in MO for liability protection from your passive rental investing.

They want to charge between $9K to $15K for these services to include some ongoing legal and accounting services.

Just want to get a second/third/fourth opinion

from the community in this plan and if there are better alternatives or more cost effective ways to get these same services.

Thanks all! Happy holidays!

While I am far from an expert, I do have an LLC for my single rental property that I have in Missouri. However, working in the corporate world, I know businesses will do all sort of things in order to get tax benefits and reduce risk for the business overall, which creates a lot of business entities in multiple states.

To me, the first two options seem to be a little overkill.  I am not sure what the benefits of the first two options are, but the more entities you have to track, the more complicated and difficult it gets to manage them properly; and keep them in good standing with the applicable state.  

For option number 3, I assume they want to set up an LLC for each of your properties? Going off of this assumption, I don't think its necessary to have two LLC's in the state of Ohio. One should be enough to hold both (or more) of your properties in the state. The risk with having one LLC vs two LLC's is that in one LLC, all property and assets may be available for the tenant to get if they win the lawsuit. However, I would assume it'd have to be a pretty serious and negligent act on your part for something like that to happen.

As I look to grow, I plan on having one LLC to hold my properties in each state I invest in. Maybe at some point it may make sense to set up a corporation, but I am far away from that.

Lastly, I would look in to what it takes to register the companies in the states yourself.  In Missouri, I submitted the application myself and got everything set up.  It's pretty easy, and I assume most states may be the same.  No need to pay an attorney a couple hundred (or more) to register with the state and get an EIN from the IRS.  What you do want to pay a lawyer for is creating an operating agreement.  I just had a lawyer review state filings and old operating agreement.  During his review, my state filing was all fine, but my operating agreement had holes in it, so he created a new one for me.

There's nothing wrong with this plan, and it has a lot of advantages. But it's top shelf for just three properties. The real question is one only you can answer - how much do you want to invest to mitigate risk? That means figuring out how much risk you have, it's potential cost, and then the correct amount in mitigating it.

Is this a plan you need now, or one that you could eventually aspire to as your portfolio grows?

More insurance is another great way to deal with risk.

Originally posted by @Brian Spies :

While I am far from an expert, I do have an LLC for my single rental property that I have in Missouri. However, working in the corporate world, I know businesses will do all sort of things in order to get tax benefits and reduce risk for the business overall, which creates a lot of business entities in multiple states.

To me, the first two options seem to be a little overkill.  I am not sure what the benefits of the first two options are, but the more entities you have to track, the more complicated and difficult it gets to manage them properly; and keep them in good standing with the applicable state.  

For option number 3, I assume they want to set up an LLC for each of your properties? Going off of this assumption, I don't think its necessary to have two LLC's in the state of Ohio. One should be enough to hold both (or more) of your properties in the state. The risk with having one LLC vs two LLC's is that in one LLC, all property and assets may be available for the tenant to get if they win the lawsuit. However, I would assume it'd have to be a pretty serious and negligent act on your part for something like that to happen.

As I look to grow, I plan on having one LLC to hold my properties in each state I invest in. Maybe at some point it may make sense to set up a corporation, but I am far away from that.

Lastly, I would look in to what it takes to register the companies in the states yourself.  In Missouri, I submitted the application myself and got everything set up.  It's pretty easy, and I assume most states may be the same.  No need to pay an attorney a couple hundred (or more) to register with the state and get an EIN from the IRS.  What you do want to pay a lawyer for is creating an operating agreement.  I just had a lawyer review state filings and old operating agreement.  During his review, my state filing was all fine, but my operating agreement had holes in it, so he created a new one for me.

 Thank you very much for your advice!  I've created entities before but want to make sure it is set up correctly for these properties.  I am leaning toward setting the entities up myself.

Originally posted by @Sean Morrison :

There's nothing wrong with this plan, and it has a lot of advantages. But it's top shelf for just three properties. The real question is one only you can answer - how much do you want to invest to mitigate risk? That means figuring out how much risk you have, it's potential cost, and then the correct amount in mitigating it.

Is this a plan you need now, or one that you could eventually aspire to as your portfolio grows?

More insurance is another great way to deal with risk.

Thank you for the advice! I am not set on putting this plan in place now. if a simple LLC entity is enough to get me by for now, then I am fine with it and slowly establish the recommended entity. I was advised by the attorney that using the S Corp will allow me to treat the gains/losses as W-2 income which will allow me to deduct the losses from my full-time W-2 job. Can I do the same with the LLC entity? I do like to have the tax advantages now if I can have it.

 

Wow @AJ Hu - 9K to 15K for all this, huh?  You better make sure you have a lot of assets/equity/cashflow to protect for that kind of setup and ongoing maintenance hassle and cost.

Do you own them free and clear? The mortgage note itself is a form of asset protection.

Have you implemented and exhausted all the other risk mitigation procedures necessary and available to you?

Just because you create an LLC (which is a legal entity, with little bearing on taxation) it doesn't necessary mean you'll be able to cut your taxes. Home office expenses are deductible regardless you have an LLC or not. Same for rental property insurance. Taking advantage of 280A and 199A requires specific conditions (like contemporary documented number of hours in business), do you meet them?

How much will be the ongoing legal and accounting services charges, and how much of your cash flow percentage will eat?

You don’t want to own properties in a S- or C- corp. (Owning Rentals in an S Corporation Might Be a Costly Mistake https://www.biggerpockets.com/renewsblog/2016/02/25/owning-rentals-s-corporation/). And if you rely on losses from your rentals to deduct (are you aware how much in what conditions?) from your W2 income taxes you should reevaluate your investing plan.

Here, some diagrams to help you in your quest for answers:

asset-protection-onion-diagram-v2asset-protection-onion-diagram-v2 asset-protection-decision-diagramasset-protection-decision-diagram

My 2¢, don't consider this legal advice - consult a specialist like @Scott Smith for that.

That sounds pretty high to me to set up some LLCs and sign an S-election. I would make sure to shop that around. That said, the main factor with hiring professionals in my opinion is personal trust and integrity of the professional. Would you trust that person in your "inner circle" giving you advice on not just business but all areas of life? Then it may be worth it to do whatever it takes to get that person on your team. So keep price in mind but sometimes their services might just be totally worth it or necessary.

Of course it would take a lot to convince me to invest $15k to set up some bureaucratic out of state LLC structure just to avoid the tax man. The benefit to warding off litigation cannot possibly be all that much higher than a bigger insurance policy. So I would at least expect the proponent to show me tax savings projections based on my unique tax situation that calculated I would make the $15k back! Perhaps if I was a public figure and wanted the anonymity I would pay a lot to get it. Anyways, I hope that helps!

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