How do Series LLC work with rental properties?

Question

Hello,

My wife  and I recently opened a Series LLC as we plan on having more properties.  I asked the banker if we will need to have a separate checking account for each of our properties but she didnt know.  Any insight here as to how they work will help us out alot. First timers...

Thank you!!

Scott Smith · Answer

Technically you don't need separate bank accounts. Due to the filing status of the Series LLC you can operate the Series LLC using the single EIN you got after filing and a single bank account. However, I only recommend this to clients who are very good with their bookkeeping, as it is very easy to intermingle funds. It isn't rocket science to run the books correctly with a single bank account, but you need to be meticulous.

On the flip side, I have seen people juggling many bank accounts to operate their different series and intermingle funds because they get the accounts mixed up... It is more about execution.

It comes down to how you are most comfortable moving forward. It is possible to run the different "child" series within the Series LLC under a single bank account, but you need to end up tracking expenses and "earmarking" them correctly - Quickbooks is a great tool for this. Some people are more comfortable with separate bank accounts, and that works too.

Scott Smith · Answer

Hey Eduardo,

Great questions.

• To form a Series LLC I will form a Certificate of Formation which is filed with the Secretary of State, and following that formation you will receive a single EIN for the Series LLC. In Texas, regarding the "children" series, the individual child series are not registered with the Secretary of State (reference other state's Series LLC laws, as this can vary).  Instead, each is created with an internal document that forms the individual child series - not granting an EIN.
• Maintaining the liability protection of a Series LLC is much like running multiple LLCs. The burden of proof will remain on you to prove that those entities are operated separately. Some people will operate each child series from different bank accounts, others will use a single account and "earmark" funds appropriately. You CAN operate it all under a single bank account, but you need to keep your bookkeeping spot on. It can streamline everything, but you just have to decide on the system you are most comfortable with. I personally find it very easy for people to comingle funds when dealing with many bank accounts - but this really comes down to the individual investor.There are other tricks to minimizing risk with finances, namely Operations LLCs, which is just a normal LLC that you end up using to do all your operations, but it doesn't own any assets. This can separate the liability from your higher liability operations from your assets when executed correctly. (EG paying bills, contractors, property management, collecting rent.)
• There are other tricks to minimizing risk with finances, namely Operations LLCs, which is just a normal LLC that you end up using to do all your operations, but it doesn't own any assets. This can separate the liability from your higher liability operations from your assets when executed correctly. (EG paying bills, contractors, property management, collecting rent.)
• I personally really like working with Quickbooks because there is a great "earmark" function that allows you to filter your actions quite easily - as long as you keep up with it. This is the road of least resistance when an investor's portfolio grows, in most cases.

• There are other tricks to minimizing risk with finances, namely Operations LLCs, which is just a normal LLC that you end up using to do all your operations, but it doesn't own any assets. This can separate the liability from your higher liability operations from your assets when executed correctly. (EG paying bills, contractors, property management, collecting rent.)

Hope this clarifies a bit.

Eduardo Rodriguez · Answer

Hi @Scott Smith,

Thank you for your advice, I have a few follow up questions if you dont mind.

I like the idea of having one checking vs one for each property.

1) Do we have to create a EIN for each series LLC?

2) Do you know if we will lose liability protection between the series if we manage it all from one business account?

3) Will we just need to write the series # on the memo line of check and keep separate receipts for each series to keep the veil intact?

@Erin Elam - no worries, great question!

Thank you both!

Scott Smith · Answer

Hey Erin,

Good questions. I have a video that breaks this down visually that I will DM to you, but I will also type it out because I can't share those links publicly on the forum and there is some general confusion about it.

You will end up filing for the "parent" Series LLC, which needs to be accepted. Once that is accepted the actual "child"  series that will be firmed under the "parent" Series LLC are private documents, and you can form an unlimited amount. That is why we always recommend keeping it to one asset per series, there is no limit. This is how it can look in practice

......................................"parent" Series LLC ......................................... Series A .................. Series B ...................... Series C ................. Etc..Property A .............. Property B .................. Property C .............. Etc.

Then there are additional structures that can be implemented to create anonymity regarding the public record for those filings. The parent LLC has a single EIN, and technically the entire entity can be operated out of a single bank account if you are very good at bookkeeping (not something I recommend to everyone, but to some it can help  a lot.)

For the question about separating you operations between the fix & flips and your buy & holds it depends on the size of your operation. Both of those carry different types of liability, so in an ideal works you would actually operate those out of entirely different Series LLCs. But, the cost doesn't really justify that until you are dealing with quite a few properties in each "pool" of asset class. The faster way to limit your exposure is through implementing the use of a Traditional LLC (without the series functions) to take over all your operations - and housing most of your highest liability actions. Some people call these "shell companies." The only thing this LLC would hold is the liquid assets moving through it - like payments for contractors, property management and rent collection - but doesn't actually own anything.

There are many levels to asset protection. I generally just encourage people to talk with an experienced attorney who also works in real estate investing - those are the attorneys who know many of the niche strategies that can make your life easier and save you money.

Erin Elam · Answer

This is a great topic! @eduardo Rodriguez hope you don't mind if I hope on this thread with you haha 😉. I'm interested in how the series LLC works mechanically.

For instance if I own ABC LLC, under which I form DEF, GHI, KJL series. Does each of these have 1 property in each series, thereby protecting each specific property from the others? Or should I only form 2 series: 1 for flips and 1 for rentals (heard that suggestion in PC #109).

Then let's say I have the structure done ... How do I sign the contract? ABC, LLC - SERIES DEF? ... I'm wondering because it seems like these names could get pretty long...

James Martin · Answer

I actually have no bank accounts for my stuff in the series.  I have a separate LLC that does the management of the properties.  It collects rents, pays bills, and tracks each cent to each property for each transaction.  So the series owns all the properties, the other LLC conducts all the business, and in that operations LLC, all the transactions are tightly segregated to a given property.

Disclosure: I am a client of @Scott Smith , he didn't tell me to set my stuff up this way (some of it was done before I engaged him), but he did give me the thumbs up for it to work this way from an asset protection standpoint.

Soh Tanaka · Answer

I'm not an attorney, but a different series is a different company, so you want to have different checking accounts for different series.

Neguiel Hicks · Answer

With any inter-related company it is best practice to maintain separate accounts. For my rental I have my personal and a separate account for rent and deposit. In my LLC I have three checking accounts, one for external clients and two for separate product ventures. This way I can track contributions to each venture independently.

The resoning comes together at tax time, just imagine someone handing you one box full of transactions committed by 7 people compared to 7 boxes containing the transactions of of all 7 people separated.

Having separate accounts is especially important if you are structuring your transactions to maximize tax write offs. For instance if you have 2 LLCs and both contribute to your health insurance the premium is a personal taxable income event. If you have an S Corp that oversees the LLC and your health insurance is reimbursed after you pay it out of your personal wages it is not income and the S Corp gets a write off.

How do Series LLC work with rental properties?

Most Popular Reply