Using LLC for property i own in my own name?

Question

I'm aware of the possibilities for either transferring a property I own in my own name to an LLC or using a land trust to hold title however I'm looking into this more deeply for now while planning to buy an initial property in my own name and start renting it out as soon as possible (I will be getting an umbrella policy). I will be using a property management company and would like to setup an LLC to deal with them and also to use for anything related to my business, for example, I would have a business credit card, mailing address, etc under this LLC. I realize this will not fully protect me and I could be at risk but I don't feel I have enough assets to have to worry at the moment so will rely on my umbrella policy for liability coverage. I'm assuming it is possible for me to setup an LLC that handles the actual renting of the property so it is the entity contracting with the property management company rather than myself directly? I'm curious what the actual mechanism is for this, would I need to draw up a lease to lease the property from myself to my llc so that the llc can then allow the property management company to rent it out? Also any hiring of contractors, etc I would want to have them deal with the LLC rather than myself as a person.

One last question is whether the LLC needs to be in the state that the rental is in or could it be from any state? Thanks for any info.

David Gotsill · Answer

Hey @James Elden - these are some interesting questions.

For the LLC as manager/operator of a property owned in your name, there are a few ways you could do it.  As you suggest, you could enter into a master lease from you (master lessor) to the LLC (master lessee), who would then rent it out (as sub-lessor) to a tenant (sub-lessee).  This is very common in multi-tenant properties (office buildings and shopping malls, for example).  Alternatively, you cold have a management agreement between you and the LLC, which authorizes the LLC to enter into leases on your behalf.  The LLC would be owner's agent, but ultimately owner is still the lessor.  The management agreement could also authorize the LLC to deal with the property manager and undertake other services that it seems you are contemplating for the LLC to handle. One would expect the LLC to be paid a fee for these services (and for which owner takes an expense).

As to jurisdiction, the LLC need not be formed in the jurisdiction in which it operates, but I imagine it must be registered there in order to lawfully do business (could be some variance by state?).  Meaning, you could form a Del LLC to manage a property in Cali, but it would have to register in Cali as a foreign entity.  It's hard to generalize, but if you're speaking of your first property, it's hard for me to come up with a situation in which you'd be better off forming in a state other than where it operates.  Perhaps tax or administration reasons?

Taking a step back, I'm not sure what advantage there is to you in having operations flow through an LLC as manager?  I see that it could be simpler to track business-related expenses, but that could be handled with a separate account.  Are you anticipating other advantages to using an LLC?  Have you confirmed there are no adverse tax consequences?  As you note, since the LLC isn't the property owner, you miss out on one of the primary reasons many investors use an LLC - limited liability for the owner.  Just curious.

Good luck!

- David

James Elden · Answer

David, thanks for the detailed reply,I think a management agreement may make the most sense. My main reason initially is just to track business related expenses more easily and keep my personal name out of things as much as possible although I realize I'm not protected fully from liability. Maybe I'm overlooking something and I could still do this though using a fictitious business name and keeping separate records I will look into that more as well.