Hi all, I was reading a book by Rich Dad Advisor Garrett Sutton and he mentioned opening a Wyoming LLC to hold LLCs operating in other states with weaker LLC protection. I wonder if anyone have done this?
My main question right now is what is the preferred way to treat bank accounts? Best practices says I should keep LLC finance and personal finance separate. In the case of multiple layer LLCs, say I have 4 LLCs:
One Wyoming LLC
Three Kansas LLCs
For paying vendors should I open and use funds from each Kansas LLC individually or can I open one bank account under the Wyoming LLC and use that for property expenses for all three LLCs? Does operating 1 bank account expose me to the "inside attack" from creditor of one LLC able to get assets from other LLCs because they're all owned by Wyoming LLC?
Thanks
I would say KISS (Keep It Simple Silly). I got started reading all those books that said I need LLCs, Land Trusts, Living Trust, etc. I formed Nevada LLC, Delaware, trusts, etc. I found in the 15+ years of doing RE that a simple strategy for anyone starting out or those who still have mortgages on properties to get good insurance with umbrella policies. Forget about using LLCs especially if you have properties in your personal name. If you have millions in assets (not talking about my West Coast investors which can one house lol) then I would stop reading books and pay for a good RE CPA.
Single-member LLC really doesn't give you a lot of protection. Why do all these LLCs and out-of-state LLCs when starting out. All the filing fees, tracking and the only person it makes sense for is your accountant who will charge you more because of these web of LLCs they have to report.
Again. If you have millions in assets and or someone well known in the community I wouldn't bother with all these strategies instead, I would work on building my portfolio.
Just my 2 cents given. I don't mean any disrespect, just giving you advice I would have given my younger self when I was starting out in RE.
Best of luck
I prefer the Rube Goldberg special when structuring LLC entities. As I've always said you just can't have too many LLC's when you own a rental property.
I prefer the Rube Goldberg special when structuring LLC entities. As I've always said you just can't have too many LLC's when you own a rental property.
Sorry, could you elaborate? I don't know what Rube Goldberg special is in LLC formation.
Google "Rube Goldberg." Just a way of making something as complicated as possible.
While I haven't done this, its been posted many times. If you want to go down the route of using LLC's, its common to do what you are saying. Some have said they have been advised they can use shared/joint accounts among their LLC's, but the safest way is to have one bank account per LLC. Follow your lines of ownership when moving/paying money. This will help protect your corporate veil.
Remember, each LLC is its own legal entity. Having its own bank account helps establish and protect it. For example, do you have your own bank account? Or, are you using your parent's bank account, literally (I hope not, but if so that up to you all). Other than the unbanked, the general practice it for each entity to have their own accounts. Otherwise, you are co-mingling funds.
Make sense?
@Allen Li
I would have at least one bank account per LLC.
On top of that you can also have a C Corp as property management and pay all contractors, expenses and collect all rents through that corporation. From that Corp bank account you can then distribute profit through each property LLC. This money can in turn be distributed to the holding LLC then eventually from there be distributed back to you.
I wouldn't use a C Corp. No reason (unless you are doing some advanced accounting) to change the category of the income from passive. the LLC's will be pass through entities by default so all the profit will flow up to you anyway and be on your tax return (and any partners you might have).
Thanks all. My follow up question is, what is the proper way to transfer funds from personal account into a LLC? A fake example: I opened a new Kansas LLC, purchased 3 properties and put them into it, and did some rehab on getting the properties ready for rent.
1. how do I fund the purchase? Do I need to first open an LLC bank account, transfer funds from personal to LLC bank and use that money for purchasing real estate?
2. how do I pay for rehab? I'm assuming it must come from the LLC, so again, transfer funds from personal to LLC bank and then pay vendors?
3. What if I have used personal accounts to pay for LLC expenses previously, such as purchasing real estate using personal account and titling it under LLC or paying vendors under personal account, but have switched to using LLC bank accounts exclusively going forward, how would the court view something like this in terms of creditor protection?
consult a qualified professional or two..
1. from my understanding in my state, yes.
2. yup, pretty much.
3. If you cross-pay, i.e. co-mingle, my understanding is you need to quickly "pay it back." For example, if you pay the plumber with a personal check, you need to have the llc transfer/pay money to yourself and annotate it in your records. You need it "set it right."
Also, there is an "owner's draw" and "contribution" transactions. Remember, you don't really 'take a profit' with pass through entity. It automatically calculated on your tax return. If you need to move funds between yourself and the LLC (or with nested LLC's, the "owning LLC" and the "ownee LLC"), you just transfer the funds between bank accounts. If you are moving funds to yourself, then its an "owner's draw." Contributions go the other way. It has to follow lines of ownership. In your example with the three KS LLC's, they have no relation. So if you wanted to move funds between KS1 LLC and KS1 LLC, you would need to move it "up" to the WY LLC that had ownership, then back down.
@David M. this is perfect, thank you. This legal structure thing is super interesting to me and I'll definitely consult a pro. So in terms of "paying it back" to correct the personal funds mingling, how does that work if I paid for the properties using personal funds? Like if a LLC holds 3 properties, and I hold each property for 100K cash, it would be impossible to pay back 300K to personal using meager LLC account funds.
If the LLC is for a few closely held members it really isn't going to provide much liability protection anyway. Don't bother unless you have at arms length LLC members.
If the LLC is for a few closely held members it really isn't going to provide much liability protection anyway. Don't bother unless you have at arms length LLC members.
Do you have some example of this? I was so sure when I read the book that you know... multi-layer LLC with the proper practice can protect asset owners. All the LLCs would be single member in my case, although I can add on my wife as a member if that is somehow better.
Your specific question about the purchase is a different issue. Correcting that is something I don't know how to do. You might just have to live with it. Realize, you normally break the "chicken/egg" issue by submitting your offers with the buyer as "Allen Li or an entity to be formed."
On the other topic, many people I think get in trouble because they treat the LLC "too closely." Also, things that an accountant says are okay are not necessarily okay for maintaining your corporate veil.
Also, did I mention you don't have to have LLC's for rentals? Many investors don't... Also, WY is usually brought up for anonymity, not other liabilities. Another well recommended book on from BP posters says that anonymity really doesn't help if you go to court since you really should/will end up disclosing your assets anyway.
I guess what I'm afraid of is asking legal entity formation lawyers and finding out there is no definitive consensus on how to segregate assets, between the Sutton guy in the book for creating LLC holding companies in WY and asking the question here already yield orthogonal answers.
If the LLC is for a few closely held members it really isn't going to provide much liability protection anyway. Don't bother unless you have at arms length LLC members.
Do you have some example of this? I was so sure when I read the book that you know... multi-layer LLC with the proper practice can protect asset owners. All the LLCs would be single member in my case, although I can add on my wife as a member if that is somehow better.
Yeah, that's the kind of thing a book might say. Talk to people who have been in real estate for years. If you get sued an opposing lawyer will easily pierce the veil and show your LLC is not a separate entity from yourself.
Mark Kohler's book had a more "meaningful" message about it being an extra layer of defense. BP had a huge discussion thread about him / his book as I recall. That's where I heard about it and decided to read his book.
As just mentioned, you need to keep the LLC operations separate from themselves. Also, it would seem very few, if any, REI (landlords) get sued. Or, they aren't fessing up to it on BP... There are the ones who say they deduct "up the wazoo" because their accountant says so... I'm talking about lots of deductions for personal items. But, they don't seem to have consulted an attorney, at not that they would respond. I am only GUESSING this is where LLC's veil gets pierced. They think its like having a sole proprietor company and deduct everything they can on it.
You know there are multiple BP members who have said they own over 20 something rentals in their personal name, some even claiming over 50....
@Allen Li
Single member LLC is easiest as the tax return is included in your personal tax return. If you add you wife (or anyone else) then you need to file a separate LLC tax return.
At least that is what I was told by my CPA. You should verify with yours.
(of course, consult with a qualified professional or two..)
Yes, with a multi-member LLC it is taxed like a partnership. So a 1065 partnership return will need to be filed first where upon the members receive a k-1 (like a w-2, 1099, etc.) which shows how to report their profit/losses on their 1040 return.
So, yes: if you can't figure out how to prepare a 1065 return and send out the k-1 (albeit to yourselves), that is just a little more cost to pay an accountant.
Hi Allen,
I've been researching LLCs also. Have you seen the Anderson Business Advisors videos on YouTube? If not, they're well worth a look. Disclaimer, I haven't used their services, so can only speak to the quality of their videos. They're excellent. I'm also not an expert in LLCs, but just mentioning what I've learned so far myself as it may help (consult with an expert like these guys are saying). A few things that I've learned around the structure that you're referring to… Wyoming LLC, owning individual LLCs which hold the rentals…
One of the key advantages in using a Wyoming parent LLC (in addition to some level of anonymity) is that Wyoming and Nevada are "Charging Order" states. What this basically means as I understand it is… if someone were to sue you individually, probably someone unrelated to your properties, in a NON charging order state, they can go after assets which you individually own, including assets inside your LLCs.
This is the opposite of the way most people think of LLCs which is… if I place this property in an LLC, someone that sues me in relation to that property, could potentially get the property in the LLC, but they can't obtain my personal assets, i.e. house, investments etc. because having the property in the LLC prevents that.
Now for the parent Wyoming LLC's charging order protection to remain intact, seemingly there are a few aspects of it that you need to adhere to. Specifically… you cannot register the WY LLC to do business in a state outside of WY. If you were to do that, the Charging Order protections that the state of WY offers are lost as I understand it.
In terms of your question around transferring funds between entities…. (again consult with an expert which I am not, but) from what I've learned there's no one right way to do this… but it seems that if you follow these rules they're solid from an asset protection perspective and likely a tax perspective as well. Assume that each rental is in its own individual LLC....
Hope this helps! Good luck,
Martin
I would say KISS (Keep It Simple Silly). I got started reading all those books that said I need LLCs, Land Trusts, Living Trust, etc. I formed Nevada LLC, Delaware, trusts, etc. I found in the 15+ years of doing RE that a simple strategy for anyone starting out or those who still have mortgages on properties to get good insurance with umbrella policies. Forget about using LLCs especially if you have properties in your personal name. If you have millions in assets (not talking about my West Coast investors which can one house lol) then I would stop reading books and pay for a good RE CPA.
Single-member LLC really doesn't give you a lot of protection. Why do all these LLCs and out-of-state LLCs when starting out. All the filing fees, tracking and the only person it makes sense for is your accountant who will charge you more because of these web of LLCs they have to report.
Again. If you have millions in assets and or someone well known in the community I wouldn't bother with all these strategies instead, I would work on building my portfolio.
Just my 2 cents given. I don't mean any disrespect, just giving you advice I would have given my younger self when I was starting out in RE.
Best of luck
@Martin M.
I concur with this.
I am also a big fan of Clint Coons YouTube channel that has a treasure chest of gold nuggets in asset protection for real estate investor. Everyone interested in the subject should spend a few hours watching this content. Start with the oldest longest videos from seminars that will give a good foundation, then go to the shortest single topic focused, more recent ones to dig into each subject.
@Allen Li
Check out Clint coons with Anderson Advisors on YouTube lots of great information for free that will answer your questions.
High level, taxes are about income and co-mingling is about using business income for personal expenses. You making an owner contribution to your business with post tax dollars (W2 income) is not considered taxable income to the business. Your business hasn't made any income from a third entity to be taxed. You personally paying business expenses is technically okay just can't do it the other way around but that's not the point of having a business, businesses are taxed on their profit, not their income so you want as many qualified business expenses being paid by your business as possible to reduce your taxable income.
Regarding liability protection, anonymity in WY is only good for one year then you have to renew it every year is my understanding and not worth it. What is worth it is the "charging order protection" meaning you personally can't make a dumb decision that affects your assets. Normally LLC says that for a slip and fall your LLC is liable and not you personally and your personal assets. But the other way around, you injure someone let's say and get sued personally, those LLC's are owned by you personally so lawyers can get to them if you don't have a holding LLC with charging order protection like in WY and a couple other places.
Finally, please go the partnership route, single member LLC'S are just sole proprietorship and there really is no protection between you and the entity you are one and the same. Should you run into legal issues a majority share vote of the LLC is needed to award a judgement. So if you are personally liable and ordered to pay damages from your LLC you 100% own then that's it, you have no say the judgements against you are 100% of the assets. If you own 50/50 with your wife and there is a judgement against you and your assets, your wife has to vote for her share of assets to be leveraged and if she refuses, 50% of the LLC is safe, assuming the corporate veil hasn't been pierced and you are holding annual meetings and keeping notes.
All if this isn't legal advice and consult a professional of course.
I believe single member LLC's are still their own legal entities, not sole proprietorships. They are just considered as "disregarded entities" by the Federal IRS and thus only taxed as sole proprietorships...
The only advice above that you should follow - "keep it simple". I have folks call me all the time wanting these nested complex LLC arrangements, but when I look at their past business history they can't even maintain one simple LLC. I have handled litigation matters involving property - the complexity of the LLC does nothing but add more time and cost to the case. Before you set up your entity structure- ask your lawyer for an actual case they litigated and how the LLC ownership or business structure was involved. Ask for the specific case and specific claims. You might find these nested LLCs aren't in play at all. Best advice - maintain your properties, have solid contracts that you actually understand (not something random from the internet) and a good insurance policy, practice clear communication with tenants and vendors, and have defined processes that set expectations.
Regarding liability protection, anonymity in WY is only good for one year then you have to renew it every year is my understanding and not worth it.
That is not correct. While Nevada needed to transfer control of the LLC to a nominee each year for the renewal, in WY, you just need an agent to sign the renewal paperwork. You don't have to declare who is in control of the LLC each year. So most registered agent will sign that document for you to file the yearly filing. You can also ask anyone you know to be your authorized agent for the filing if you want.
Anonymity will not protect you if you are named in a lawsuit, but it will protect you against frivolous lawsuit being started. If a simple internet search of your asset shows that you have plenty of money, you are making yourself a bigger target.
Also, as you mentioned, WY has excellent charging order protection, so having your holding in WY that owns other LLC in other states, will give you the charging order protection to all the other LLC in the other weaker states.
Regarding liability protection, anonymity in WY is only good for one year then you have to renew it every year is my understanding and not worth it.
That is not correct. While Nevada needed to transfer control of the LLC to a nominee each year for the renewal, in WY, you just need an agent to sign the renewal paperwork. You don't have to declare who is in control of the LLC each year. So most registered agent will sign that document for you to file the yearly filing. You can also ask anyone you know to be your authorized agent for the filing if you want.
Anonymity will not protect you if you are named in a lawsuit, but it will protect you against frivolous lawsuit being started. If a simple internet search of your asset shows that you have plenty of money, you are making yourself a bigger target.
Also, as you mentioned, WY has excellent charging order protection, so having your holding in WY that owns other LLC in other states, will give you the charging order protection to all the other LLC in the other weaker states.
Thanks Mike for the clarification of NV vs WY
The only advice above that you should follow - "keep it simple". I have folks call me all the time wanting these nested complex LLC arrangements, but when I look at their past business history they can't even maintain one simple LLC. I have handled litigation matters involving property - the complexity of the LLC does nothing but add more time and cost to the case. Before you set up your entity structure- ask your lawyer for an actual case they litigated and how the LLC ownership or business structure was involved. Ask for the specific case and specific claims. You might find these nested LLCs aren't in play at all. Best advice - maintain your properties, have solid contracts that you actually understand (not something random from the internet) and a good insurance policy, practice clear communication with tenants and vendors, and have defined processes that set expectations.
Mitchell, you mention a lot of good points and I want to pick your brain on this a bit deeper. When you say
I have folks call me all the time wanting these nested complex LLC arrangements, but when I look at their past business history they can't even maintain one simple LLC
Do you mean that you don't have faith that these clients can follow the rules of these nested LLC to properly utilize it or do you mean that these nested LLCs simply do not work?
Also, would you agree based on your observation that a lot of tenant led litigation are brought on by contingency fee attorneys? If disagree can you elaborate? I think the reason for doing nested LLCs behind a WY holding company and properly maintaining records, minutes etc is to deter contingency fee attorneys from picking up their case or discourage them, because they only get paid if they can close, and for a large enough lump sum instead of slow charging order payments. In my rentals at least I don't have rich renters, I have blue collar single mothers and kids just out of college with no way to hire lawyers except partner with contingency fee attorneys. Granted, I 100% agree that managing rentals properly and buy umbrella insurance is the best way, it's just I don't want to own 50+ rentals and face any issue where insurance company won't pay and lose them all.