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
Probably a little of both. Maintaining separate entities requires a lot of work and discipline. And it is not always the owner's error that causes the problem. I see contractors just putting down any name to get paid, then the owner pays. But have you now messed up the LLC walls? That's for you to defend later. Yes - major issues (death or major injury) will mostly likely involve a lawyer on contingency. But they aren't going to take your word for it on which entity to pursue. They will instead add all of the entities and you personally and let a court or jury figure it out. Small tenant matters - they are just as often represented by non-profits or pro bono lawyers. They aren't concerned about the "billable hour" - they are seeking a result. You might spend more in legal fees defending your structure than the claim they will make. As for insurance - find out why the insurance wouldn't pay and address that scenario. Have your lawyer review it and explain the coverage. Whatever will keep them from paying, it won't be because you didn't have enough LLCs. I know many of the investors think it is okay to go without a lawyer. It might be. But if you have a good lawyer you can ask for their specific experiences (not just blog posts - actual cases) and find out where past clients went wrong - then avoid those mistakes. You will find that most of the time the LLC structure isn't what created the liability.
@Allen Li I agree with some of the other comments. Sounds like you need to sit down with a real estate savvy CPA and/or local business attorney and ask the questions specific to your situation.
Accounting and liability are really two different issues, with some overlapping areas. Single-member LLCs are generally disregarded for tax purposes and if so, they don't file separate returns from the sole owner, so that is mostly a matter of record-keeping and properly accounting for where the money came from and went. A CPA can help there. However, as you infer in #3 - for liability protection, how you conduct business and observe formalities could make a difference. Aside from keeping the money from each business separate, separately insuring each holding LLC with the proper level of liability insurance might help prevent liability from spreading to other assets/LLCs. Consult with an experienced business and real estate attorney about doing it the right way. Have refined questions ready for them based on the comments in this thread and your specific situation.
Sometimes to bootstrap a new LLC, you have to put some of your own money into it to get things going, like buying an asset, or repairing a property, paying for insurance, etc. When you do that, record it as a LOAN, from you personally, to the LLC. Keep track of all loans, and make a point of repaying loans first, before taking any profits from the LLC when it starts to make money. This also helps you reduce tax burden, because a loan repayment is not profit, its part of the operation of the business. Once all loans are repaid, leftover money you pay out to yourself is generally taxable profit. Of course, always talk to a tax professional for tax advice. The money you pull out of the LLC for yourself after all loans are paid out is often called the owner draw. For my management company LLC I even have it buy office supplies - if it's low on cash, I might loan it money to buy those supplies! Keep track of everything, and repay the loans first.
If you have made a bunch of little loans throughout the year and still can't repay it by the end of the year, I sometimes write up a promissory note for the total amount borrowed, from the LLC to me (the lender). That way it's grouped into a single legal document, expressing the total amount owed. Then, next year hopefully profits can repay that loan, at least partially if not fully. I write and sign a loan-release, from me to the LLC, once the debt is fully repaid. I do not charge my LLC interest on the loan; that just complicates things, although I suppose it would be technically possible to charge a reasonably low interest rate on the loan.
That's pretty complicated... I thought for it to be actually a "loan" you need to actually charge interest. Basically, make it an arms length transaction.
When you start a LLC or any company, you need to capitalize it. That we talked about doing owner's draws and contributions. Since its a pass through entity (unless you elected to be taxed as a C Corp), you'll pay tax on your 1040 on your profits, not on what you take out of the LLC.
Disclaimer: I am an attorney, but I am not your attorney. This is not legal advice, just friendly information.
Just a quick note about charging order protection, which is being thrown around a lot here. There is no one-size-fits all answer.
First, all states have charging orders as a remedy. And the vast majority have it as the exclusive remedy.
Second, that remedy often breaks down when it is a single-member LLC. A few states (like DE and WY) have made clear that charging orders are the exclusive remedy even for SMLLCs.
However, while the general rule is that a state should uphold the laws of another state's LLC, that's not always true when it comes to real estate. Because states like to keep control over land in their jurisdiction, many states will only apply local LLC protections, and ignore those fancy WY or DE laws.
Finally, if you have a WY holding company that owns a Louisiana LLC with property (where charging orders are not the exclusive remedy), that Louisiana LLC does not magically gain an exclusive remedy protection. That LA LLC could be subject to foreclosure.
Finally, if you have a WY holding company that owns a Louisiana LLC with property (where charging orders are not the exclusive remedy), that Louisiana LLC does not magically gain an exclusive remedy protection. That LA LLC could be subject to foreclosure.
My understanding is that the charging order as sole remedy will only protect you from outside liability attack. Inside liability protection is almost the same in all state. If a liability arise from inside the LLC, you can lose all the asset in the LLC but it won't propagate to the member/owner's other assets held outside that LLC (fraud and company veil piercing excluded).
In case of an outside liability claim, if you own an LLC in a state where the sole remedy is the charging order, a debtor can not reach into your LLC, but just get a charging order against the distribution made, if any. So if you have an LLC in a weak asset protection LLC state like LA, by having this LLC owned by a holding in a strong state like WY, and you in turn owning the WY holding LLC, if you have an outside liablity claim, the risk stops at the charging order of the WY LLC. You don't have any direct ownership to the LA LLC and there is no risk of outside liability to it as its owner is the WY LLC. So while technically the LA LLC does not have charging order protection, by having it owned by the WY LLC, your LA LLC is gaining the charging order protection of WY.