New to Real Estate · Fresno, CA · Member since 2019 · 36 posts · 8 votes
Hello everyone!
I'm wondering if an LLC that's gonna hold rentals and do some flips needs specific permits and licenses here in Fresno CA. I know that it's better to set an LLC for every rental property, considering that the main purpose is asset protection, but I also read that you could have more than one under the same LLC as long as they have low equity. Since here in California is so expensive to conduct business I would like to start with just one LLC and, once the equity starts to grow, set them in separate ones.
Thank you so much in advance, and please stay safe!
While I don't know California, you want to keep your short term investments, or flips, separate from your long term investments, ie rentals. It's for asset protection. Your flips are "generating" lots of potential liability including after they are sold. So, no point mixing that up with your long term assets. So if you are doing both, then you need two LLC min.
Since California is so expensive to operate a LLC, why not skip the LLC for the long term rentals? Just get insurance and an umbrella policy? Have you read some of the many opinions/advices?
If you are seriously concerned about liability on the other hand, consider having one LLC do the rehab. This LLC would hold any licenses, registrations, commercial liability insurance, etc. Then, have another LLC take Title to the properties to be flipped. You would own each LLC. Basically, if the property every got sued or had a problem, it wouldn't tie up your rehab operations. Furthermore, if the LLC holding Title has done a lot of flips, you could fold that up and start a new LLC wirh no historical liability. If somebody wanted to bring a lawsuit on one of your older properties, there would be nothing to go after since that LLC is closed and has so assets.
While I don't know California, you want to keep your short term investments, or flips, separate from your long term investments, ie rentals. It's for asset protection. Your flips are "generating" lots of potential liability including after they are sold. So, no point mixing that up with your long term assets. So if you are doing both, then you need two LLC min.
Since California is so expensive to operate a LLC, why not skip the LLC for the long term rentals? Just get insurance and an umbrella policy? Have you read some of the many opinions/advices?
If you are seriously concerned about liability on the other hand, consider having one LLC do the rehab. This LLC would hold any licenses, registrations, commercial liability insurance, etc. Then, have another LLC take Title to the properties to be flipped. You would own each LLC. Basically, if the property every got sued or had a problem, it wouldn't tie up your rehab operations. Furthermore, if the LLC holding Title has done a lot of flips, you could fold that up and start a new LLC wirh no historical liability. If somebody wanted to bring a lawsuit on one of your older properties, there would be nothing to go after since that LLC is closed and has so assets.
Your welcome. Perhaps you need to take a look at what is your liability, and how to mitigate it. With California having that hefty ~$700 annual fee, you might just have one LLC that does your flips and leave the long term stuff in your personal name. That's what I do; its simpler. However, the two LLC approach above basically is like having an insurance premium of $700 a year, ie the LLC, that helps with segregating your assets and providing some level of protection.
There are several considerations that can go into the analysis of whether you need an LLC or whether a large insurance policy will suffice. Will depend on several factors like the type of property, type of tenants, your risk tolerance, other assets you own, your estate planning, laws where the property is located, etc.
Any lawsuits would be limited to the assets of the LLC and not your personal assets (assuming you run the LLC appropriately and the corporate veil is not pierced). But, an LLC will not limit you from liability in total. You can still lose your investment in the LLC. If you're going the umbrella insurance route, make sure it will cover you for several things including just the routine slip and fall (like mold or earthquake). You'll also want to ensure you have a good property manager to look after the upkeep of the property if you are not there to notice anything deteriorating or which may need attention.
This article goes into a lot of the considerations about whether to form an LLC or not: https://www.mmpph.com/wp-content/uploads/2019/04/May-2019-newsletter.pdf
Creating an LLC in California would cost you a minimum tax of $800 every year. You would have ongoing filing requirements with the State and would need to keep business records and documentation.
You also want to look at whether a pass-through entity helps your bottom line and your taxes. There is a new 20% pass through deduction you may qualify for that could help you, but not everyone qualifies. You should still be able to get this even if the properties are not in an LLC, if you qualify.
These are all things you will want to discuss with your attorney and CPA. If you need references for either of them in San Diego, let me know.
*This post does not create an attorney-client or CPA-Client relationship. The information contained in this post is not to be relied upon. Readers should seek professional advice.
@Katie Lepore thank you so much! I've read a lot about LLC's and corporations but it's been a little confusing to me. Also I've asked around here in Fresno but all they tell me is that my best option is the LLC and no one gives me like a more detailed answer or advice like you've done. I really appreciate your help!
@Edith Alvarado de Cortez i use LLC's for mine, however every situation is unique so it's usually best to consult a lawyer for all this so they can set you up the way you need to be in regards to what kind of entity you need, it could be an LLC, S-Corp, etc... and then they can advise you how to hold them such as LLC's owning LLC's, your trust owning an LLC, etc