Moving rentals into LLCs w/ girlfriend but single-member LLCs are all we hear about?

Question

My partner and I are unmarried, own some rental properties together, and want to set up asset protection. Deeds are currently in our personal names and we do not file taxes together since we are unmarried. We have several properties we co-own, but I keep hearing all of the asset protection plans talk only about single-member LLCs being the way to go for the ease of taxes end-of-year since those are pass-through/disregarded entities. We know we'll need an additional company above that one (possibly multiple ones) that owns the LLCs, but I'm getting no real answers about how we should structure the LLCs to both maintain ownership without complicating taxes by having a ton of multi-member LLCs that have to file taxes separately at additional costs. Has anyone dealt with this? These properties are in NC and SC and we are also looking for reasonable attorney recommendations for good, solid asset protection plans that involve LLCs owned by another company and possibly an irrevocable trust of some sort on top of that (not totally foreign). Any help or advice would be much appreciated!

Luis Alvarez · Answer

Hi @Andi Morgan I will preface this with the fact that I have a legal background, specifically with estate planning and asset protection.  However, this is not specific legal advice to you, just an opinion based on the circumstances described. To your points:

My partner and I are unmarried, own some rental properties together, and want to set up asset protection. Deeds are currently in our personal names and we do not file taxes together since we are unmarried.

First, I would never own rental properties in my personal name.  Yes, there are many out there that do it and nothing bad has ever happened, and I say kudos to that, I just would never do that.  Second, in terms of asset protection, as some have mentioned, LLCs are not invincible, but I think what many don’t understand is that they are not designed to completely shield your assets from liabilities, on the contrary they are designed to contain and isolate liabilities.  They keep inside liabilities inside and outside liabilities outside.  Read that again.  The reason you see a person’s name and all their entities listed in a lawsuit is because Plaintiff (the suing party) attorneys have to list everyone and every entity that can be remotely tied to a cause of action, otherwise, if enough time passes and through the legal process discover that a separate entity or just a person was truly liable and they didn’t name them in the lawsuit, they are out of luck.  Basically, they name everyone because they’re hoping and counting on the fact that people set up their own LLCs and didn’t adhere to basic entity maintenance and kept things separate (like bookkeeping and separate bank accounts).  Umbrella Policies are good, but they are not an asset protection tool, they only cover litigation/damages after you’ve already been found liable.  Also, most Umbrella Policies only pay out if your underlying policy pays out, and the underlying policy will do everything they can to find an exclusion or that you were negligent (which you probably were) in the cause of action to get out of paying the claim.  And yes, attorneys make money from forming LLCs, but they make way more when you were negligent and didn’t know what you didn’t know and end up in a lawsuit.

We have several properties we co-own, but I keep hearing all of the asset protection plans talk only about single-member LLCs being the way to go for the ease of taxes end-of-year since those are pass-through/disregarded entities.

An LLC can be treated four different ways for taxes: as a sole prop, as an S-Corp, as a Partnership, or not recognized at all for tax purposes (IE it is a disregarded entity).  I am not a CPA, but I have experience seeing LLCs (with multiple members) be disregarded and everything flows out to each Members’ 1040s.

We know we'll need an additional company above that one (possibly multiple ones) that owns the LLCs, but I'm getting no real answers about how we should structure the LLCs to both maintain ownership without complicating taxes by having a ton of multi-member LLCs that have to file taxes separately at additional costs.

This sounds like you’re referring to a holding entity, which depending on revenue/volume can sometimes be treated as an S-Corp to really ramp up tax efficiencies (again I am not a CPA, but I have conferred with some to get the best structures once one hits this point).  For me personally, only one of my entities files a separate tax filing, and it’s because it is worth it.  A well thought out and detailed Operating Agreement can quell concerns over succession or what-if scenarios.  In essence, you and your partner are just that…you’re partners.  Treat it accordingly.

Has anyone dealt with this? These properties are in NC and SC and we are also looking for reasonable attorney recommendations for good, solid asset protection plans that involve LLCs owned by another company and possibly an irrevocable trust of some sort on top of that (not totally foreign).

Owning properties in different states is not a concern I have, I have established corresponding LLCs in the home state (where the property is located) to then transfer title of said property to that LLC.  This is the only way one can avail themselves to the laws and protections of each state in which the property is located.

Hope this helps.

Andi Morgan · Answer

@Jerry W. Thank you for the thoughtful response! We do have living wills that already dictate that each other is inheriting everything if one of us dies, as well as prenups that will dictate us leaving with any properties we had before we got together if we decide to split. If we own properties together and split, we have agreements to split them evenly sans any extra downpayments or improvements that were contributed by one person alone. I was thinking this was probably enough, but you bring up a good point about ensuring these things are also laid out in the operating agreements, and ensuring we have a plan for LLC dissolution or buy-out for those joint properties. Thank you for that! I'll put it on my list of things to work through with whatever attorney we end up using.

Luis Alvarez · Answer

Hi Andi,  there's some nuanced questions/issues in there, ultimately, it depends on what your goal (for ownership) is.  You can certainly hold title in one (passive) entity and have a separate (active) entity run operations and all that, and that's where an S-Corp election can make sense, so long as you are generating enough revenue to warrant the extra work for that. We'll chat and discuss further.

Andi Morgan · Answer

Thanks to everyone here for these thoughts. My plan is first to move the SC short-term rental into an LLC by itself and to group the other long-term rental properties into small batches. Since some are single-owned and others are owned by my partner and I, one strategy I was considering was having all of them (including the SC short-term rental) be single-member LLC's that are owned by one other multi-member LLC. That multi-member LLC could be owned then by my partner and I. Does anyone know if this would offer additional protection or if I'm better off separating out the short-term rental into its own multi-member LLC? I have heard that you should hold title in one LLC and operate from a different operating entity (either another LLC or a different structure). In my first plan above, the multi-member LLC that own the other single-member would be the operating company, but I'm not sure if this exposes all of the properties to each other's liability. I cannot find any NC attorneys to help me in the near future despite many calls. It's just a busy time of year.

Jerry W. · Answer

@Andi Morgan, you have so many things going on here I don't have time to address them all.

First LLCs are not magic, but they work very well if you set them up and use them them correctly.  Yes you can be sued personally anyway, but more often than not they are dismissed in a Motion for Summary Judgement.  When a state makes a law saying we are giving this kind of protection judges are obligated to follow the law.  There are lots of exceptions, just like how a Dr. treats an injury, they do it like this, unless this happens, or like this if that happens, etc.  They do work, but are not silver bullets.  I was legally sued by a little old lady because I dismissed the criminal charges against her spraying a guy with mace, then hitting him with a taser. I met the "victim" and I wanted to mace him after a two minute conversation.  I had to answer that lawsuit, but the judge dismissed it for a lot of reasons.

You do have problems about how to file your tax returns if you start joining your significant other into existing single member LLCs.  All of the same stuff is still put down, but it is on separate filings, not as a schedule, C, D, on your personal 1040.  That is an accountant issue you need to work out.  What you really need are excellent operating agreements.  It is great you are sharing life and finances with another, but what happens when one of you decide to love someone else, or what if one of you goes bankrupt, or even dies?  Their children or brothers and sisters may now become your partner, and they don't love you. they just want all the money they can get.  You really need things to say what happens when one partner wants out or one dies.  How do you set the sellout price?  How long do you get to set up a loan to buy them?  Who handles the day to day decisions on buying or selling a property if you cannot agree?  Are you forever deadlocked?  Those should be decided before you add the significant other.  Once you add them into the LLC you are married in a very real sense, financially. Hopefully you worked those things out long ago, if not good luck.  Resolve while you are still in love.  There may never be a problem, but the odds are very high that it could.  Either way I wish you good luck and happiness.

David M. · Answer

@Andi Morgan

This is an interesting one...  You are investing with a non-spousal partner, so legal entity would be waranted...

Just shooting from the hip...  The two of you are members to the "holding LLC."  Have that holding LLC be the member to the LLC in NC and the one in SC that hold Title to the properties.  The NC and SC LLC's are single member LLC so they disregard / flatten out to the holding LLC which then only has to file one partnership return.

One other approach is to use a "property mgt" LLC that runs the leases.  Then the NC and SC llc's are just "quiet" and you don't have to manage their bank accounts, etc.  It lets you brand the pm llc.  It should take a few contracts between your LLC's.  There is plenty of discussion if that constitutes self-management or other reasons to void your corporate veil.  But, then again, there are plenty of other potential issues to piercing ones corporate veil.

Just be mindful that if you go "too" crazy on these asset protection plans, its gets complicated and pricey.  Both in startup and maintenance / operations.  We've had a fair number of posts of investors who went down that road and years later regretted it.

Bill B. · Answer

Each of you get separate umbrella policies job done. Keep it simple. You would add so much complexity and costs with financing, tax returns and record keeping for most likely no benefit. Meanwhile one of you gets in a car accident and you both lose all the co-owned properties if they’re in an LLC or not.

Moving rentals into LLCs w/ girlfriend but single-member LLCs are all we hear about?

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