Business Structure and expenses

[Jason R.]

I currently have one property rented out, I own and manage it under one LLC (I am the only partner). My question relates how to properly pay for and deduct business expenses across multiple entities. Especially if the expense is a piece of equipment that is used for your business as a whole and not just one property.

If I am wanting to buy equipment for the business, say a computer or software or a lawnmower, that is not directly related to a particular property - Is it ok to pay for it with my personal account and write it off and not pierce the veil?

What if I buy a second property in another LLC, how would I expense it then? Would I need to pay for it partially out of each LLC's account?

What if I buy a second property under my own name and rent it out? 

Do you all create LLC's as a holding company to make these types of purchases from?

Thanks all!

[Carl Miller]

For my multi-property clients, I set up a management LLC that will buy assets used on all properties and then I have the property holding LLC's pay a monthly management fee to the management LLC. It takes a little fine-tuning to figure out how much that management fee needs to be to cover the expenses but in the end, it helps to accurately reflect the profitability of the individual units.

If you pay for an asset directly from your personal account and contribute it to the entity, you're not in serious danger of someone making a "piercing the veil" argument in a lawsuit. If you use entity money to buy yourself a trip to Europe for a vacation, that's when you're opening yourself up to the argument that the entity is just your personal piggy bank. I would not hold a property in your own name because if the situation arises where there is a claim against the property not covered by insurance, all the assets held in your name become available to settle the claim.

Insurance companies are a great resource for learning how to mitigate your risk. I understand why people keep insurance policies but I always advise my clients that insurance companies are not in business to pay out claims. They're in business to make money. Why would you sink $100k into a property plus another $1K (ish) per year for insurance and then decide not to protect your personal assets with an LLC?

Look, I get that real estate is an expensive business and that most investors are looking for mailbox money. At some point you'll get that result but in the early stages, there is no better investment than educating yourself and working hard on the business model so you have usable reporting, adequate income, appropriate expenses, quality tenants, and good firewalls. It's not easy. It's another job but people who don't treat real estate like a business generally don't last.