So many LLCs - some advice needed

8 Replies

Morning everyone. I am looking for some strategies, ideas and advice on how to structure our partnership with regard to LLCs. My situation is thus: I own 3 small MFH with a partner. Our Operating Agreement is still being flushed out, but is close to being finished. Each time we have purchased a new place, we switch off who goes on the title so that one of us won't bear the debt to income brunt and we can each eventually carry 10 traditional mortgages.

To date we have opened, started and have 1 LLC (a 50/50 split) and have quit claimed the first 2 properties into it. We have not yet filed taxes for 2017 - an accountant is working on that now.

As I went to quit claim the third property, I called the broker to walk through it again with him and he sat on it for a day, talked to some folks and then told me that we were actually hurting ourselves by doing that - b/c now both of us were on the hook for both properties - so we were in fact doing the exact opposite of what we were trying NOT to do. Whoops. Beginner's Luck!

First let me state that I understand some folks will have a separate LLC for each property to limit exposure/liability. I do not *think* we are interested in doing that as it seem cumbersome with regard to banking: 3 accounts per property = 9 bank accounts = too many accounts + the expense of opening LLCs, etc...I'd be willing to hear a counter argument though.

The broker understood that and thus suggested for each of us to open our own (separate) LLCs, then in our Operating Agreement, have the original LLC be "in charge" of the other two. Then...quit claim the houses respectively into our individual LLCs (as title will match the owner).

This seems complicated but do-able. It also seems much less cumbersome and expensive than each property having its own LLC.

I'd love any/all input that you all may have, including if an S-corp or something else may make sense? Thanks.

Hi @Christen G. ,

With limited liability protection (what LLCs offer), successful plaintiffs are only able to seize the assets that are in the LLC unless they are able to "pierce the veil" and sue you individually as well. So your broker is correct that because all of the properties are in the same LLC, a successful plaintiff would be able to go after all of the properties.

In regards to your reason for not wanting a separate LLC for each property, I don't understand why you would have 3 bank accounts for each property. It should be just 1 bank account for each property. However, I agree that there are good economic reasons to not have too many LLCs. I think it is a balance between the benefits of reducing your liability by separating your assets into different LLCs and the operational costs of doing so.

Your broker's suggestion is a bit complicated, and if you look at it based on title doesn't make sense. Why would an LLC owned entirely by you pay 50% of the profit to another entity?

You really need to consult with a lawyer and a CPA together. The Broker is trying to help but he isn't an expert when it comes to asset protection and taxes. I know you want to save money but you are going to end up costing yourself more in the end if you do this wrong. 

LLC laws vary by state so what works for me in Texas may not work for you in WA. Talk to a lawyer.

Thanks @Brian Schmelzlen - first on bank accounts: 1 operating/1 tenant deposits/1 capex per property. 

Unfortunately - I'm not sure I understand your last question - an LLC owned by me would be for the properties where I am solely on title. What I think the broker was saying is that then the original LLC (50/50 partnership) would be the controlling entity over both my (new) LLC and my partner's (new) LLC....

Originally posted by @Christen G. :

Thanks @Brian Schmelzlen - first on bank accounts: 1 operating/1 tenant deposits/1 capex per property. 

Unfortunately - I'm not sure I understand your last question - an LLC owned by me would be for the properties where I am solely on title. What I think the broker was saying is that then the original LLC (50/50 partnership) would be the controlling entity over both my (new) LLC and my partner's (new) LLC....

What your broker is suggesting does not work for splitting the profits between you and your partner. Your goal is to split everything from all of the entities 50/50. Ultimately, that means regardless of whether you have 1 LLC or several, each LLC would have to be owned 50/50.

But I will walk through my interpretation of your broker's suggestion. There are 3 LLCs. There is a "master LLC" that you both own 50/50, and an LLC you own 100% (lets call it A LLC) and an LLC that your partner owns 100% (lets call it B LLC). The last 2 LLCs own all of the real estate. Based on that, all of the income from A LLC flows to you, and all of the income from B LLC flows to your partner (who in this scenario is not your partner). The Master LLC would not get any of the income, so it has nothing to split.

If you want to get the income from A and B LLC to the Master LLC without the Master LLC owning A or B LLC, Master LLC would have to perform services for A and B LLC. But what services could it perform that would provide a business justification for paying all of the profits from A and B to Master LLC? Plus the IRS would look at this and likely say that Master LLC actually is the owner of A and B (given that all of the profits go to it) which would defeat the whole point of this setup.

As you can see, your broker's suggestion is needlessly complicated and ultimately does not work (unless I am missing something).

If you want to operate 50/50 with a partner, you both need to own the LLC (or LLCs) 50/50.

Hey @Christen G. , just ran across your post about multiple LLC's and wanted to provide my input! I completely understand the hesitation creating multiple LLCs - with multiple filing fees, multiple bank accounts, etc - it can create quite a headache!

My law firm actually specializes in asset protection and we typically recommend a Series LLC - which involves a "Parent LLC" and multiple "Children LLC" - each of which have their own property, shielded from the liability of the other "Child" LLCs. The benefit of this is there is only one bank account for the entire Series LLC (as long as you keep accurate accounting records!). Further, this business entity form can be expanded when each new property is acquired. When combined with an anonymous land trust, this form of asset protection can provide both limited liability for your properties and anonymity in all of your purchases.

If you are interested in learning more, my podcast here on Bigger Pockets would provide some helpful information.

Hope this helps!

Originally posted by @Scott Smith :

Hey @Christen G., just ran across your post about multiple LLC's and wanted to provide my input! I completely understand the hesitation creating multiple LLCs - with multiple filing fees, multiple bank accounts, etc - it can create quite a headache!

My law firm actually specializes in asset protection and we typically recommend a Series LLC - which involves a "Parent LLC" and multiple "Children LLC" - each of which have their own property, shielded from the liability of the other "Child" LLCs. The benefit of this is there is only one bank account for the entire Series LLC (as long as you keep accurate accounting records!). Further, this business entity form can be expanded when each new property is acquired. When combined with an anonymous land trust, this form of asset protection can provide both limited liability for your properties and anonymity in all of your purchases.

If you are interested in learning more, my podcast here on Bigger Pockets would provide some helpful information.

Hope this helps!

Many thanks! Going to listen/DL now. Thanks agains. 

Not sure, but if I were you I would not consult bloggers for legal and tax advice of such nature, I would spend the couple hundred dollars and meet with a lawyer & CPA to get correct advice and make sure it is correct instead.