Do I put my buildings my restaurant is located in in an LLC
Member since 2019 · 2 posts · 0 votes
I own a restaurant/bar in two buildings. I it's been open 11 years. I just set up the restaurant in a s corporation from an LLC. Right now the buildings are in my name and rented from me by my restaurant. I getting mixed advice from attorneys and accountants on if I should put the buildings in a separate LLC instead of in my name. My concern is if I get sued personally what happens to the buildings affects my business. I also have 6 rentals that are in my name and not LLC. My attorney said LLC are expensive tax wise and any good attorney can get past them if I get sued. He suggested a umbrella policy under my personal properties. Thanks for any help on this. Ilene
Llene:
I'm not clear why LLCs would be "expensive tax wise". I hear California LLCs have onerous costs but most states LLCs are cheap to maintain. You do however have to maintain them including keeping minutes, separate financials, ideally separate bank accounts, and file tax returns. Still, that is just a few hours a year and a few hundred bucks each year.
I do agree that before you figure out what entities you want to create, an umbrella policy is a great first step. These are written from your personal residence but can be extended to include all your rent property, cars, boats, etc.
Personally, I just kept single family rentals in my name and had great insurance. For bigger properties or properties where there may be greater liability risk, I would talk to an attorney about putting it in an entity.
My 2 cents.
Thanks, the main expense I was thinking of is tax preparation. I'm leaning towards putting the two commercial buildings in an LLC and keeping my rental houses in my name.
When meeting with clients the first order is to discuss (A) their personal assets, (B) break down their current investments portfolio and other business ventures before discussing any (C) future goals. Each of these variables will dramatically change the advice for the individual asking this question. I often break it down into the "five pillars" of protecting your assets.
1st pillar is avoiding unnecessary and risky activities (don't drink and drive, insurance generally won’t cover your poor decisions) and take good care of your investments - these simple steps will help you prevent lawsuits before they even occur.
2nd pillar is a good insurance policy as that cover the majority of your exposure. However, insurance is limited because it only protects you from one type of liability: accidents/negligence. Insurance doesn’t protect you from any part of the sale or acquisition of a property (e.x. Somebody wanting to sue for you backing out of a bad deal or accusing you of selling them a property with defects like unknown termite damage). Insurance also doesn’t protect you from misunderstandings, especially those made in writing and email. What happens in these misunderstandings is that something goes wrong either in the sale or after, and then they sue you for some statement you made that they “misunderstood”. That lawsuit is a claim for fraud, and that’s what fraud typically is...a misunderstanding and someone being “injured” and wanting to hold the other responsible for it. Insurance never protects you from these kinds of claims and they happen all the time.
3rd pillar applies after you have good insurance You need to protect yourself from what insurance doesn’t cover by compartmentalizing your assets. Compartmentalization means that if something happens to one property they can't touch you or the other properties. You should use either LLC's (the old and expensive way) or a Series LLC (the new and more cost/time effective way). No matter where you live or where you own assets, I personally recommend the Series LLC to be a great tool for the individual investor who is planning to expand their operation, as it allows for you to scale infinitely for FREE- check out this article to learn more.
4th pillar is somewhat similar - you want to separate your operations from your assets. One company owns everything and does nothing (this is your SLLC a/k/a "asset holding company") and a completely separate company handles all of your operations (this is a traditional LLC a/k/a "operating company") For the operating company which serves as your face to the world and through which you do all your business, you establish a Traditional LLC to carry out the operations of your investments. The operating company takes on all of the liability that would otherwise blow back on you including: paying property management, paying contractors, collecting rent, marketing, etc.
5th pillar is owning everything anonymously. If people don't know what you own, then they are less likely to sue. People don't sue people that qualify for food stamps. This anonymity can be accomplished for free by using Trusts to own your companies as well as the assets. Trusts create this anonymity by removing your name from public record. Even if they can see you used to own a property, when properly transferred it will look like it was sold to investors. If they somehow guess you are the owner still, it doesn't matter because you are not the owner. The trust and the LLC are the owner of the asset/real estate, so even in the scenario that they guess, they guess wrong.
In regards to businesses I have seen people use three LLCs. One for the operations of the LLC (which holds the majority of the liability, but no asset,) an LLC for the brand itself, and an LLC for the actual building. This is a lot to put together, but it is a good way of separating assets and essentially "compartmentalizing" it into different functions.
In your situation a Series LLC could really help you separate everything out. If you are in California this will include a high annual franchise fee, but you can also look into the Delaware Statutory Trust - as this isn't charged that franchise fee.
If you have any questions on this stuff, feel free to ask or DM me.
This isn't legal advice, just my opinion as a real estate investor.