Question about LLCs
New to Real Estate · Metro Detroit · Member since 2023 · 8 posts · 2 votes
Question about LLCs
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Accountant · Long Island, NY · Member since 2021 · 183 posts · 145 votes
1moQuote from @Paul Green:
I am looking to purchase a second rental property early next year. I was reviewing my plan with my financial advisor, and he recommended I restructure my LLC.
1.) Have a separate LLC for each rental property.
2.) Move all of the rental property LLCs into a single holding LLC.
Does anyone here do this? And did you use a lawyer to set it up?
Hi @Paul Green - This structure is generally recommended. I'd personally save money and use a registered agent to set up the LLCs. Paying an attorney to do so will cost significantly more.
Definitely use a lawyer when deeding properties to the LLCs. Everything beforehand can be completed by you! Even a quick consult with a tax advisor or attorney to determine the exact structure (SM LLCs/two-member holding LLC/etc) will cost less than hiring them for the entire entity formation process.
Lastly, never rush into creating entities. The advice you received seems sound, but there are entity structure "gurus" that will sell you on unnecessary structures, costing you thousands and more in tax filing fees. You want to have a structure that does not negatively impact the tax side of things or create any unnecessary filings.
Everyone's situation is different. For someone just starting out, a bigger insurance policy might make more sense than the entity headaches.
10 Replies
- Accountant · Long Island, NY · Member since 2021 · 183 posts · 145 votes1mo
Quote from @Paul Green:
I am looking to purchase a second rental property early next year. I was reviewing my plan with my financial advisor, and he recommended I restructure my LLC.
1.) Have a separate LLC for each rental property.
2.) Move all of the rental property LLCs into a single holding LLC.
Does anyone here do this? And did you use a lawyer to set it up?
Hi @Paul Green - This structure is generally recommended. I'd personally save money and use a registered agent to set up the LLCs. Paying an attorney to do so will cost significantly more.
Definitely use a lawyer when deeding properties to the LLCs. Everything beforehand can be completed by you! Even a quick consult with a tax advisor or attorney to determine the exact structure (SM LLCs/two-member holding LLC/etc) will cost less than hiring them for the entire entity formation process.
Lastly, never rush into creating entities. The advice you received seems sound, but there are entity structure "gurus" that will sell you on unnecessary structures, costing you thousands and more in tax filing fees. You want to have a structure that does not negatively impact the tax side of things or create any unnecessary filings.
Everyone's situation is different. For someone just starting out, a bigger insurance policy might make more sense than the entity headaches.
- New to Real Estate · Metro Detroit · Member since 2023 · 8 posts · 2 votes1mo
Thanks for that!!!
- 1moStuart UdisPro MemberAttorney · Philadelphia · Member since 2018 · 2k+ posts · 3k+ votes
@Paul Green More important than creating an LLC is understanding the liability exposures you're actually likely to face as a real estate owner and how conflicts, disputes, and claims are resolved when they happen.
That's where most people fall short. They spend all their time focusing on the entity itself while ignoring the practical day to day responsibilities that minimize the likelihood of disputes and claims arising in the first place. I've posted hundreds of times on this subject.
As for LLC's there are so many factors, including asset value, type of use etc. that should be considered when deciding how to title your real estate and whether a separate LLC should be used for invidual properties.
- Investor · Get yourself trained before doing something inadvisable. · Member since 2024 · 3k+ posts · 1k+ votes1mo
Quote from @Paul Green
@Stuart Udis:
@Paul Green More important than creating an LLC is understanding the liability exposures you're actually likely to face as a real estate owner and how conflicts, disputes, and claims are resolved when they happen.
That's where most people fall short. They spend all their time focusing on the entity itself while ignoring the practical day to day responsibilities that minimize the likelihood of disputes and claims arising in the first place. I've posted hundreds of times on this subject.
As for LLC's there are so many factors, including asset value, type of use etc. that should be considered when deciding how to title your real estate and whether a separate LLC should be used for invidual properties.
Stuart is correct. What I see is the person who owns the LLC is named in the lawsuit as well as is the LLC. There are some advantages to owning an LLC, but it isn't the rubber suit of protection it's made out to be. Spend some time asking questions to find out if it'll do what you want it to do.
- 1moJason MalabuteBusiness MemberAccountant · Los Angeles, CA · Member since 2016 · 2k+ posts · 897 votes
That setup of a separate LLC per property rolled up under one holding LLC is pretty common and generally reasonable, but keep in mind it's really a liability and asset-protection tool more than a tax strategy, since single-member LLCs are disregarded for federal taxes and the income still flows straight through to your return. You can usually save money by using a registered agent to form the LLCs yourself and only bringing in an attorney for the actual deed transfers, and even a short paid consult to lock down the exact structure will cost far less than paying someone to build the whole thing out. The main thing is not to over-engineer it, since plenty of asset-protection "gurus" will sell you layers you don't need, and when you're just getting started a solid insurance policy sometimes does more for you than the extra entities and filings. Exactly what makes sense really depends on your situation, so it's worth confirming with your own CPA or attorney.
Malabute & Company CPAs525 Reviews - Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes1moI think a single LLC for each asset is overkill unless it’s owned outright and has no debt on it. Otherwise it’s overkill and you will spend your entire year cash flow on your cpa and banking.
7e investments53 Reviews - 1moAshish AcharyaBusiness MemberCPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes
Paul, I would not automatically build a separate LLC for every rental plus a holding LLC just because that structure is common online.
From the tax side, an LLC by itself generally does not create tax savings on a rental property. A single-member LLC is usually disregarded for federal income-tax purposes unless another tax election is made, so adding more LLCs can create more legal and administrative work without changing the federal income-tax treatment.
I’d decide how much separation you actually need based on the property equity, insurance coverage, financing, liability exposure, state filing costs, and how large you expect the portfolio to become. For two rentals, I would not rush into an elaborate structure unless your attorney can explain exactly what additional protection each layer is providing.
And yes, I'd involve a real estate/asset-protection attorney if you are restructuring ownership. The legal benefit of the LLC is a state-law issue, while your CPA should make sure the structure does not create unnecessary tax consequences.
Since these are rentals, I’d also evaluate cost segregation once each property is placed in service. It can accelerate depreciation on qualifying components, but the key is whether those losses are actually usable. Rental losses are generally subject to passive-activity limitations unless an exception applies, so a larger depreciation deduction does not automatically mean an immediate tax benefit.
I’d keep the structure as simple as possible until the portfolio actually justifies more complexity.
Happy to connect!
INVESTOR FRIENDLY CPA®5241 Reviews - 1moStuart UdisPro MemberAttorney · Philadelphia · Member since 2018 · 2k+ posts · 3k+ votes
I do not believe Ken fully understood my comments. Who gets named as a defendant depends on the facts, but whoever holds title to the property is a good bet to be named. By that I mean whomever is listed on the deed. Deeds are publicly available and easiest to attach a claim to.
One of the biggest wasted expenses I repeatedly see property are owners who keep the property in their own name or title it to an LLC, then create a separate "management LLC" believing that if a claim is filed, only the management company will be named. That is simply wrong. A plaintiff's attorney may name the management company, but nothing prevents them from also naming the deed holder. In most premises liability cases, that is exactly what you should expect.
Most owners focus solely on preparing their entity, or mistakenly their management company, to absorb liability. They fail to understand the next step, which is how different types of claims are actually resolved and which insurance policy must respond first.
The biggest mistake I see is failing to structure agreements between the property owner and vendors with appropriate risk shifting provisions, indemnification obligations, and additional insured requirements. Even a properly drafted renters insurance provision can shift certain liabilities and require another insurance policy to respond before the property owner’s policy. Entity structure matters, but it is only one part of a much broader risk management system which has far greater impact on how claims are actually resolved, impact loss run reports, insurance costs and availability.
- Investor · Get yourself trained before doing something inadvisable. · Member since 2024 · 3k+ posts · 1k+ votes1mo
Quote from @Stuart Udis:
I do not believe Ken fully understood my comments. Who gets named as a defendant depends on the facts, but whoever holds title to the property is a good bet to be named. By that I mean whomever is listed on the deed. Deeds are publicly available and easiest to attach a claim to.
One of the biggest wasted expenses I repeatedly see property are owners who keep the property in their own name or title it to an LLC, then create a separate "management LLC" believing that if a claim is filed, only the management company will be named. That is simply wrong. A plaintiff's attorney may name the management company, but nothing prevents them from also naming the deed holder. In most premises liability cases, that is exactly what you should expect.
Most owners focus solely on preparing their entity, or mistakenly their management company, to absorb liability. They fail to understand the next step, which is how different types of claims are actually resolved and which insurance policy must respond first.
The biggest mistake I see is failing to structure agreements between the property owner and vendors with appropriate risk shifting provisions, indemnification obligations, and additional insured requirements. Even a properly drafted renters insurance provision can shift certain liabilities and require another insurance policy to respond before the property owner’s policy. Entity structure matters, but it is only one part of a much broader risk management system which has far greater impact on how claims are actually resolved, impact loss run reports, insurance costs and availability.
Your comment "Who gets named as a defendant depends on the facts" Is not correct.
It's whoever is even associated with the property and who has deep pockets that gets sued. It's up to the defendant to prove their innocence to the judge and try for a motion to dismiss which is up to the judge to decide. That's the practical application. Happens just about every lawsuit.
- 1moBasit SiddiqiBusiness MemberAccountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
Did the financial advisor list out what the benefits would be of such a structure?
What are the anticipated costs of moving all your properties from the current owner to the new LLC's?
Are the benefits presented to you worth the costs?
Basit Siddiqi CPA4.979 Reviews
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