All Forum Posts by: Daniel Chang

@Brandon Hall @Sheba Shimoji

Brandon, I defer to your expertise in this matter. However, what I was alluding to is a different scenario. It seems the case you bring up is where the parent S-corp owns through partnerships the subsidiary LLCs. Furthermore, it talked about deducting the management expenses from his LLC against the S-Corp active income. It was vague as to what these management expenses were.

I had assumed that Sheba was talking about where she owned properties in her name or LLCs, and has a separate S-Corp. Hence no parent-subsidiary relationship. Essentially, she would expense a management fee from the LLC and it would be revenue to her S-Corp. The S-Corp would have its own expenses in running a management company (office supplies, software, etc.). While I do not see a benefit in doing this as it would create a greater tax liability, is it your opinion that this cannot be done?

@Sanjay Sharma

It sounds like your futures are uncertain.  Therefore, what you are suggesting is somewhat like a holding company, and how to structure this holding company.  If you futures are uncertain, I would recommend against this.

Instead, when you are ready to purchase a property, create a LLC and a operating agreement just for that property. Create a separate one the following year when you decide to purchase another property. Therefore, you are essentially creating multiple small partnerships. For instance, may be a few years later, one of your partner decides that he no longer wants to keep buying real estate, well then on your next deal, he just wouldn't be a partner.

You may also want to read up a bit on operating agreements.  There's a lot of standard issues that you'll need to work through as you have alluded to.  What if someone dies? Divorce?  Can you transfer interest?  Can you sell?  

I'm not an accountant but I've studied partnership taxation.  Let me tell you, it is very complicated.  Especially if someone wants out with unrealized capital gains or outstanding loans.  So best not to start a partnership with anyone who may be uncertain about their goals.

@Sheba Shimoji

Disagree with Rob, yes you can do this.  However, if you personally own all the rentals, why would you?  There is essentially no tax advantage to do so.  In fact, you likely pay a bit more in taxes converting passive income (no self employment tax) into earned income.  

This would make sense if you do not own the rentals completely. For instance, if you own 25% of the LLC that holds the rental, and your partners agree to pay you for the management, then I do think you should create a S-corp as a management company, whereby you pay yourself as employee.

This would also make sense that if you want to earn income from managing other people's properties in addition to your own, hence a true property management company.  

**I'm not an accountant**

Your attorney is doing what an attorney does.  Advise on maximum protection for you, irregardless of cost.  Now you need to use your business sense to weigh the benefit/risk analysis.  

It's more than the cost of having separate LLC. It's also the headache. You did not factor in the paperwork needed for each one, nor the increase in accounting bills. Having and maintaining separate bank accounts...ugh.

Instead of protecting each property from each other, perhaps you should consider protecting a certain equity or certain revenue stream. Ie, you will use one LLC for up to $200,000/yr in revenue before starting another one, or will use it once you have $200,000 in total equity. That certainly makes more sense than just having separate properties in separate LLCs.

At the end of the day, this is a decision only you can make, as it deals with how risk tolerant are you and what makes you sleep at night.  

@Danny Cerecedes

Chris is right. CA expects your LLC to be doing in business in CA simply on the basis that you live here.

https://www.ftb.ca.gov/businesses/New_Rules_for_Do...

It sounds like you are getting started. Don't get into paralysis by analysis with this LLC stuff. Believe me, I did the same thing. I read many books, articles, etc, and spoke to many asset protection attorneys. You will get different opinions many times over, because there is just no case law to establish the precedence. I've had attorneys try and sell me on multiple layers of trusts/ LLCs, off shore FLPs, etc. Remember, all this protection is theory. No one can really say how much a certain setup will protect you.

Yes NV has better laws than CA. However, if you live in CA, and own property in CA, and get sued by someone in CA that slips and falls on your CA property, do you think a judge will say "but the mere fact your have an NV LLC, NV laws apply"?

Unless you are a high net worth individual, then my advise is to keep it simple.

- Use an LLC in the state you will be doing business in

- Separate out your active companies (flipping, managing, etc.) vs your passive buy-holds.

@Mosun Mah

If you do, CA will expect you to register the LLC in the state. There's a franchise tax of $800 /yr. CA also charges a separate fee based on GROSS revenue, the 1st fee of $900 is charged at $250K. Therefore, if you have income properties coming from 2 states, your accountant will need to file an LLC tax return in CA and need to separate out only the revenue from CA, otherwise, including revenue from other states will increase your chances of getting hit with the LLC fee. To be clear, this is not pass through taxation, this is specifically a fee for the LLC based on the gross revenue of the LLC.

Now that being said, I see your title states you live in CA. Unless you are a passive / limited partner in your Colorado LLC, CA expects that you are doing business in CA with your Colorado LLC, owning Colorado property just because you as a principal in the company live here (ridiculous I know).

https://www.ftb.ca.gov/businesses/New_Rules_for_Do...

So if audited, CA will charge you the franchise tax fee regardless. Keep in mind, your LLC income is pass through to your Schedule E on your personal tax return, so CA is aware you are deriving income from your Colorado LLC. So it might make sense to go ahead and register the Colorado LLC in CA to get it legal, and then use it to hold CA properties since you were thinking about it anyways.

My 2 cents - I'm not a lawyer nor accountant.

Seth,

To fully be 50/50, you will need to get the bank to lend to the LLC, and have all parties as guarantors. This is the cleanest way to do it.

Everything else you are talking about is only going to get yourselves into arguments, challenges and possibly even IRS issues.  I do not see another possibility of having it "50-50 with no complications".  Because you being on hook for a loan is not 50-50.   Your tax burden is not 50-50.  Them having no cost basis is not 50-50.  You get my drift.

@Kenneth LeBeau

Yes it does matter, more than just to keep it simple for tax purposes. You are in essence commingling funds. It also sounds like you are under-capitalizing the business. I'd imagine you set up the LLC for asset protection. Commingling funds and undercapitalized business are some of the most common reasons that the corporate veil can be pierced. Essentially, by doing this, setting up an LLC offers you no protection if the corporate veil can be pierced easily.

While it's a hassle, keep LLC expenses in the LLC. It also means possibly setting up a separate credit card for the LLC if you use credit cards.

If you do occasionally pay for LLC expenses out of your personal account, make sure it's accounted for correctly with your bookkeeper. However, I advise you to keep this to a minimum.

Dominic

I already have the heebie jeebies about these guys based on your posting.   I suspect these guys are new to the field.  They don't have a business plan, and rather only a bunch of ideas and still formulating them, that's why they are changing things up.  If they really valued your contribution, they wouldn't be cancelling on you.  It's possible they cancelled on you because they truly are just that busy.  Or it's possible it's all for show.  

Have you ever heard anyone starting a business and only wanted to be the average business in the area?  The fact they want to be the biggest means nothing.  

It's not unusual for a company to want a new employee to buy into their "culture".  However, having you worked full time while "training" sounds like trying to get free labor to me.  They are probably breaking a few labor laws by doing this.

What I've learned is that if you are uncomfortable already, it will only get worse.  If it were me, I would take my time, effort, and energy into figuring out another way.

@Byron Bohlsen

Regardless of legality, I think all the posters including myself can plainly see, that it is your bill and you should pay it.  If the sellers truly "cheated" you and it was fraudulent, then sue them for it on its own merit.  Especially since we are only dealing with a gas bill on a duplex, and we are in summer, I can't imagine it's more than $50?  You'll never get ahead in life by being petty.   Just do the right thing.

That said, I believe legally it's their bill.  For most utility companies, this whole landlord/tenant switch thing is an option, and if you have the ability to choose not to have it (granted if you don't mind the utilities shut off when vacant), I don't think you are legally responsible for it.  However, I'd imagine the utility company can choose to not provide service until it's paid.  (not a lawyer, just my educated guess).