LLC for each property?
Crestwood, KY · Member since 2014 · 5 posts · 1 vote
My CPA suggested forming seperate LLCs for each rental property I purchase. He states that this limits my liability if there is an issue with one property. I have just one property currently, but I plan to purchase another soon. The idea of multiple LLCs seems cumbersome and confusing. I'll have a hard enough time keeping the paperwork straight operating one LLC. I understand his reasoning, but I thought I'd get the experts' opinions here. I do have healthy liability insurance ($1,000,000).
Chris brings up the most important point of having to pay fees & taxes for each LLC. For the best asset and privacy protections, you should consider putting them in a Land Trust, with a Personal Property Trust as the beneficiary. Also using a Roth IRA will give you tax free profits for retirement...
Good luck!
Another point to consider with separate LLCs is a potential foreclosure. No one likes to think about the deal going south, but with separate LLCs, it may be more difficult for a lender to take back your property if something bad does happen.
Firstly: Holding each property in a separate LLC is the optimum arrangement, assuming a clinical environment where everything is done correctly at all times.
That having been said, most real estate investors don't operate in a clinical environment. I've seen countless scenarios where investors pay for the big expensive multi-LLC setup, and the attorney advises them to follow all formalities, keep all funds separate and operate them as separate entities. This lasts a few months, then the investor gets some bad advice that "oh, don't worry about commingling funds, all these formalities are not necessary" and all the benefits of the structure get thrown out the window. Bottom line, it's a PITA to manage all these separate LLCs and the most benefit you're getting is protection in that 0.1% chance scenario when you have to completely abandon a property.
I don't let clients forming a trust leave my office without signing the deed funding the trust. Why? Because there's about a 50% chance that the client won't follow the instructions I gave them and the benefits offered by the trust will be rendered useless. As an attorney, I believe it's my job to make sure you're getting the protection you paid for. Most people approach estate planning and business formation as a one-time expense, but really they are things that require ongoing attention. No sum of money paid for the initial package is going to exempt you from the burden of managing these entities individually. Trust me, managing ten bank accounts is not fun, and I'll bet that the attrition rate for these multi-LLC structures is pretty high. I'm all about avoiding headaches and unnecessary complication.
It is not hard for a lender to take back the property or do a foreclosure if you fail to pay no matter if it is in an LLC or not and chances you personal sign for the loan. That is Guru talk thinking you can hide a property in an LLC to keep the lender from foreclosure.
Joe Gore
We have 32 units and do not put them in LLC's. We just purchase an additional 2MM umbrella policy on top of our insurance. That in addition to E&O insurance should be all you need. The hassle and expense to put each property in a LLC is not worth it to us however, you should put each apartment complex in a separate LLC. Also watch out for a due in sale clause if you transfer deeds to a LLC when having personal financing on a property.
You should pray no one sues you, with all your eggs in one basket, you are risking a pettifogging shyster taking you down for much of what you owe.
Also, in CA, its $800 to file the paperwork for a LLC, regardless if you make a dime, and $800 a year extra, so CA is the last place to set up multiple LLC's for lower end properties.
Good luck there Jason!
We have 32 units and do not put them in LLC's. We just purchase an additional 2MM umbrella policy on top of our insurance. That in addition to E&O insurance should be all you need. The hassle and expense to put each property in a LLC is not worth it to us however, you should put each apartment complex in a separate LLC. Also watch out for a due in sale clause if you transfer deeds to a LLC when having personal financing on a property.
You should pray no one sues you, with all your eggs in one basket, you are risking a pettifogging shyster taking you down for much of what you owe.
Also, in CA, its $800 to file the paperwork for a LLC, regardless if you make a dime, and $800 a year extra, so CA is the last place to set up multiple LLC's for lower end properties.
Good luck there Jason!
Different strokes for different passive aggressive folks Christopher. I appreciate your concerns...I pray often but usually its for sick friends/family and not for being sued :) One mans perspective and I feel all my insurance policies provide adequate protection. Furthermore personally I do not want to deal with multiple LLC management, costs, due on sale clauses and title issues as you are still personally liable if notes are not under your LLC as well which have higher commercial rates. I've solely invested in TX for the last 12 years and closed my CA LLC and reformed in a business friendly state many years ago. I would never give CA any of my business or money as there are a lot more business friendly states to do business in. How would you advise the original poster?
We have 32 units and do not put them in LLC's. We just purchase an additional 2MM umbrella policy on top of our insurance. That in addition to E&O insurance Different strokes for different passive aggressive folks Christopher. I appreciate your concerns...I pray often but usually its for sick friends/family and not for being sued :) One mans perspective and I feel all my insurance policies provide adequate protection. Furthermore personally I do not want to deal with multiple LLC management, costs, due on sale clauses and title issues as you are still personally liable if notes are not under your LLC as well which have higher commercial rates. I've solely invested in TX for the last 12 years and closed my CA LLC and reformed in a business friendly state many years ago. I would never give CA any of my business or money as there are a lot more business friendly states to do business in. How would you advise the original poster?
Hi Jason,
In CA, the cost to do multiple LLCs is prohibitive, unless they are million dollar projects, and if you are only using a couple JV partners, it could be a good option on larger transactions. Otherwise a Limited Partnership is good for multiple investors, or a JV agreement for one agreement. You just have to be careful if you are pooling money, so as always, consult a competent real estate and securities attorney.
For personally, the land trust is a very strong asset protection vehicle if you know how to drive it. Randy Hughes, Mr. Land Trust has beginning & advanced training, which i have attended, to help you use them as the big boys do.
And finally, no one plans to be sued, though if slip & falls attorneys who troll public records see you a few times, you got a huge target on your back for nuisance lawsuits at the bare minimum.
Mike,
Your CPA is correct in reducing your liability, individual LLC's will help reduce (but not completely eliminate) your liability between your different properties. What other replies are saying is also something to consider. If you create multiple LLC's you can either tax them individually, which will cost you more at tax time. Or you can create what are called disregarded llcs which will fall underneath your main LLC, at tax time you will still only have one filing. There are advantages and disadvantages to both options and you should seek the advice of a professional when making this decision. You have two different issues in play here, one is legal and the other is tax. I believe that your CPA wouldn't even suggest this unless he had a good reason for tax benefits. There are many real estate attorneys that can advise you on the legal side also. I happen to work for one that specializes in this exact area so if you need someone to work with PM me and I will get you in contact with him.
IMHO I own 10 houses and do not have an LLC. I will be putting all mine into a single LLC when I refi them next month. I think it all depends on the amount each is worth. Mine are worth 200k or less, with most being around 100K or so, so I keep a million dollar umbrella policy to cover me. I agree with most and talk to a knowledgeable attorney and take their advice. There is to much variation in cost per state.
Recently saw and watched some interesting info from @Scott Smith - podcast #109. Still new so evaluating what he has to say. Our lender actually recommended an LLC as well as our CPA but hadn't discussed one for each property or the Series LLC's that Scott mentions.
This is one area where everyone is going to have a differing opinion and risk tolerance. Another variance once you have a handful of properties: you can have multiple LLC's set up to hold property in (with very little check writing and activity), but then have a management LLC set up that that you run most expenses through. This cuts down dramatically on bookkeeping upkeep. Idaho is simple an inexpensive for setting up and maintaining LLCs though. ($100 filing fee and no annual fees after that).
@Jonna Weber I wonder what you mean by 'management LLC'? I am about to form an LLC for my rental property and wanted clarify if there are specific LLC types I should consider.