In the past I've held properties in my name and received rents in my name at a generic mailbox and never had a problem. Also, I have umbrella policy that covers additional liability exposure for my properties. Now I would like to add a level of privacy and would like to know how other landlords have set this up and if I am missing anything in my plan below. This is only for a few rental properties and is in the state of Georgia. My over-riding goals are to keep this simple (no complex entity structuring, tax strategies, or additional tax returns for now). I want to remain being taxed personally for now.
1. Continue to hold title personally (until later when I have a larger portfolio).
2. Create a new LLC that would essentially act as my "real estate business" company for all of my rental properties, meaning I would collect rents in this company name and write checks for repairs AND capital improvements for these properties. It would be formed as a single member LLC (pass-through entity). Not sure if I should elect to be member-managed or manager-managed or if that makes any difference since I am only member.
3. File for EIN fo the LLC from IRS and use that to setup 2 separate bank accounts. One to deposit the rent checks and to write checks from for expenses (repairs, capital expenditures, utilities). The other account would be just for holding all of the security deposits from the rentals (like an escrow account). I would make loans from my personal account to this new business account to fund it as needed (not sure how formal that needs to be though). And occasionally I will pay myself personally from that account some amount (not sure how much or how often).
When filing for the LLC I would use my 'generic mailbox' as the LLC address and will find an attorney to be my Registered Agent. I was thinking of filing the articles of organization myself, as well as the operating agreement, though I could ask the attorney what he charges to do that. I want to set this up in time for my next rental coming on the market (ready in a few days), so would like to do this all asap. This company would be the "face" of my business to my tenants.
Does anyone see holes in this plan (other than the obvious not holding title in LLC's, but I can deal with that later when I get more properties). Note I would not use this new company for flip properties. I would setup a separate LLC for that.
Thanks in advance for any opinions or suggestions.
I think it looks like a pretty solid plan. I would definitely look at putting all your properties into LLCs or one LLC, unless they are leveraged, in which your lender probably would not approve of it. You could also setup a DBA for yourself, and your LLC and/or future LLCs; note different LLCs and you yourself can all have a DBA with the same name (e.g. Ryan Properties), and then you can setup a website with a corresponding name - ryanproperties.com - then use that so tenants can pay rent online, look at information about your company OR properties & submit maintenance requests online. Your business card can even say "Ryan Properties" on it.
Note - RentPayment.com is a low cost & easy to use service for getting rent payments online; I highly recommend them.
@Ryan E. I am not sure if you need to apply for EIN for Single Member LLC since it would flow through to your SSN on taxes anyway. Also, I noticed that you plan to setup an Escrow Account for Security Deposits, which is a great idea, but I dont think its required in Georgia until you get to a certain number of properties. Overall, the plan seems sound.
I'm a big fan of series LLC's for long term hold strategies. Some favor land trusts but series llc's are so new that there's not a lot of case law on how to handle them. They effectively work as setting up an individual llc for each property under one name i.e. Texas Holdings llc series 1, Texas Holdings llc series 2, etc. You have to be careful about how you keep your books but I know a couple people in Atlanta that would be able to give you some better advice on how to structure that up.
I've got the same overall plan as you (and I'm also in metro Atlanta), but I plan to have my LLC taxed as a corporation rather than pass through. Reason is that I don't need or want extra income right now (my holdings are for retirement income) and I want to keep it away from my personal tax return. Also, I plan to build reserves and want to keep that apart from personal savings. Any extra would either go toward more properties or principal. No profit or income for me for 10+ years at least. Anybody here set up their LLC for corporate taxation? Tips on keeping all money inside the LLC so it doesn't hit my personal tax rate?
I'm going to file the paperwork in January 2015 (don't want to deal with a 2014 tax return right away!). @Ryan Harthan -- do you know whether Georgia allows series LLCs? Any Georgia investors know? I talked to a CPA who works with small business, but she didn't know for 100% sure.
We have a two member LLC (my wife and me). We hold the real estate in the LLC and have the commercial loan in the name of the LLC. We did get an EIN because our bank required it to open the business account. We set up the LLC on Legal Zoom and that was a breeze. We also serve as the registered agent. My attorney who does work for us on another S Corp that we own said that DIY LLC's are fine for single member entities, but use an attorney if there are multiple partners or any thing that needs to be spelled out in the operating agreement.
I've never heard of an LLC that pays corporate taxes. By definition a LLC is a pass through entity. I would check with your CPA on that one.
You can have your LLC taxes as an S corp, but the S corp does not pay corporate taxes. The income from the company is still passed to your personal return on a schedule K1 from the business. The benefit to being taxes as an S corp is to reduce self employment taxes and to take advantage of additional deductions.
I've done the S Corp formation but I found out I'm still paying the same amount of taxes. If I hold it in the S Corp and not distribute it as income I minimize self employment but I wind up paying taxes to hold it in the corp... If you made money you owe Uncle Sam, they're collecting one way or another...
You don't have to have a separate bank account for security deposits, but sometimes that's nice because then it's more visible that way.
@Tee Cruse - I think I get what you're saying. My goal is not to save on taxes, but to avoid increasing my own personal income. I'm a single wage-earner and have kids going to college soon - we get by ok on what I make now and don't want to screw up any financial aid possibilities we might have. How can I keep all business income poured back into the business and not show any profits at the end of the year?
@Anna Watkins I would advise you to speak with a CPA that specializes in Real Estate. They will be able to give you the best options for your situation.
@Tee Cruse - Thanks. I'll have to look one up. Anybody have recommendations for an RE CPA near City of Decatur?
Wow, thanks for the great replies everyone. I appreciate all your input on this topic.
@Steven Glasgow I did not know about being able to tie a DBA to multiple entities (self & LLC's). I like your suggestion. I will also check into the RentPayment.com option, as I would like to offer an electronic payment option at some point.
@Stan Butler Good point about the EIN not being needed. That saves me an additional step. Glad you brought that up. The only reason I was going to setup a separate account for Security Deposits is that I've been told by a couple of landlords that once you start doing business in an LLC/Corp in GA, that the "10 property" rule no longer applies and a separate account is required even if you have fewer than 10 properties. I can't verify that for sure, but the folks that gave that info to me included a long-time landlord, as well as a CPA/Landlord.
@Ryan Harthan I've seen several posts about the series LLC's before and I have to say that they do sound very convenient and logical to use. I didn't know they were available in Georgia though, but if you don't mind letting me know your Atlanta contact for more info on that, it would be much appreciated.
Thanks again everyone. You've all given me a lot to think about for both now and in the near term as I begin to hold more properties.
We had a LLC and I closed it. I actually wrote a long article on my website discussing it and why we closed it.
*self manage- if you self manage you pierce the corporate vail
*Mortgages- if you put it in an LLC you violate your mortgage. While not a big deal today, in the coming years when rates, double or triple. I wouldn't be surprised if banks start looking for loop holes to call mortgages.
@Ryan E. if your goal is to simply add a layer of privacy and truly keep it simple, then just file a fictitious business name with your county clerk. You can then open a bank account using the fictitious name and instruct your tenants to pay rent to that business instead of your personal name. No EIN, tax return, entity, or deeds required. Simple.
Title will remain in your name--you can't hold title in a fictitious name. So if anyone wanted to figure out who owns the property it can be done, but it isn't in their face on the first of every month.
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