All Forum Posts by: Scott Smith

Originally posted by @Ramiro Rodriguez:

Looking to start wholesale and flipping homes currently flipping land lots I have flipped 3 so far. Should I get an LLC to keep doing this? If so where can I go to get one? I'm in Texas

 Hey Ramiro,

You will want an LLC from an asset protection standpoint when you begin investing in assets that are worth more, so the real question is WHEN you should start adding the additional costs involved. This article breaks down a general approach to asset protection, so it should help explain the general process of growing your real estate investments. The best bet would be to chat with an experienced attorney who can explain the exposure you face and talk you through the formation and operation of LLCs. Also, be sure to look around the forums, as people discuss these types of questions quite often!

Hey Christian!

You account shows that you are from MD, so you will also need to take into account that you will need to take care of the foreign filing and fees involved. I would encourage you to at least chat with an attorney to ensure that you create and operate the entity correctly, since the will be different annual requirements for LLCs between different states. You will also need a Registered Agent. 

One option I have seen investors use to work around the foreign filing fees is to transfer the out-of-state property into a Land Trust, then assign the LLC [from the investor's home state] as the beneficiary. This still offers the liability protection of the LLC, but since the Land Trust is considered the entity that is "doing business" in the state in question you aren't required to pay the additional foreign filing fees.

An attorney with real estate investing experience should be able to talk about some strong strategies that can help you forward if you meet with them. 

Hey Maria,

I would recommend it. The chances of you being invested go up as you attain more properties, and in the case there would be a lawsuit that exceeds, or is excluded by, your insurance policy it can directly impact both the property involved and any other personal assets you have. The LLC functions like a stop-gap, so if one of your properties is involved in a lawsuit than only the property (properties) in the LLC are at risk because they are separated from you. The ideal is to have each property protected in an LLC, or through the use of a Series LLC for investors with multiple properties, so that any potential legal action will be contained. If you have all your properties in a single Traditional LLC a legal action can impact all of those properties, though it shouldn't be able to impact you personally.

I often explain to people the "5 Pillars of Assets Protection." As you have more money invested into your properties you want to continue to add more "pillars" to support the additional exposure you face. Each investor has a different risk tolerance, so ideally your attorney should be able to talk you through your options. 

Good luck to you moving forward! Feel free to shoot any other questions my direction, if you have more.

Originally posted by @Joe E.:

@Scott Smith Ok, tracking most of that so far. And again, thanks so much for your help!

From a work flow perspective: 123 Main St. generates cash flow, which is titled to 123 Main Street Trust & held by Child Series A.

How does it get from there to the operational Traditional LLC, and then ultimately to me (presuming at the parent Series/Trust)? Structure I understand now, it's just overall work flow.

Also, for the operational Traditional LLC, wouldn't I be self-employed at that point?

Sorry for the late response, I was out of town for a short time. 

This is where you need to  get pretty comfortable with your bookkeeping, since you want to track these very accurately in order to maintain the corporate veil and avoid commingling funds. With that being said, it is still very straightforward. I will compare the two most common ways people approach this:

W/ Traditional LLC: (1) rent collected for '123 Main St.' by Traditional LLC-> (2) Funds deposited to Traditional LLC bank -> (3) Funds transferred to Series LLC bank as a "contribution from '123 Main St.' Child Series A -> (3) Funds can be transferred from Series LLC bank to you as a distribution.

W/out Traditional LLC: (1) rent collected for '123 Main St.' into your name (or by your property manager) -> (2) Funds deposited to your account (or the account of the property manager) -> (3) Funds transferred to Series LLC bank as a "contribution from '123 Main St.' Child Series A -> (3) Funds can be transferred from Series LLC bank to you as a distribution.

You just want to show a paper trail in order to prove that the entity operates on its own. Mainly you want to ensure the contributions and the distributions are correct, so that you don't commingle funds by using the LLC accounts as your personal account. The trick is that the burden of proof would be on you to show that the funds are flowing properly in court, so you just want to get comfortable transferring the funds correctly. But, as you can see above, the Traditional LLC removes a lot of the risk with yourself as the "middle-man" in the process.

The Series LLC and Traditional LLC are both considered a disregarded (pass-through) entities. Because they are disregarded, you will report your tax information for the LLC on your individual tax return.

Feel free to shoot me any additional questions you might have. I usually explain this stuff while talking, so if this still isn't clear, just let me know!

@Joe E. I would deem it wise to have a Traditional LLC that you use for operations or as a "shell" company. And then a Series LLC for asset holding.

It is correct that for optimal protection you will have trust embedded in the Series LLC, the structure looks like this (for lack of having a chart available at the moment here we go:

​Series LLC (parent LLC)

Agent Trust (anonymity)

Child Series A >>>123 Main Street Trust >>> Property: 123 Main Street

Child Series B>>> 456 Main Street Trust >>> Property: 456 Main Street

Child Series C >>>789 Main Street Trust >>> Property: 789 Main Street.......... (etc)

The ​Series LLC, is a great structure that was created for investors who intend to scale and grow. It also involved land trusts to aid in offering the ​best financing options while also offering you ​anonymity. My clients have not expressed any issues with the purchase or sale of any properties that are in the Series LLC entity nor any issues with taxes. Its actually quite the opposite. But, this is where the need for an experienced team comes in to provide the appropriate guidance.

If you want any clarification on any of these points just tag me again and I can answer them or feel free to send a DM.

*This isn't legal advice, just my opinion as a real estate investor.

@Kurt Delia 

Hey Kurt – congrats on leaping in. To keep everything simple my recommendation is typically to have one LLC that you use for operations and one Series LLC that you use for asset holding. Anything more than that is over-doing it in my opinion.

I don't see why you would create a holding llc and property management llc in addition to the 2 current LLC's because that is a ton to keep up with. Your fee to your CPA will be double as well as your on-going maintenance to keep those LLC's in compliance.

With the simplistic process of having one LLC for operations and one Series LLC for asset holding; you will save yourself a ton of time, money, and headache which would occur if you move forward with juggling 4 LLC's – yuck! I would presume to think that the reason they suggested that is because it is important to keep your properties held separately however that is what the Series LLC does while streamlining banking and taxes. Creating each child series beneath the "parent" in the Series LLC structure provides the separation of assets so if something were to happen to one property it cannot affect the other.

Here is an article that I wrote for BP that will provide some more insight to this structure: https://www.biggerpockets.com/blog/the-traditional-llc-vs-the-series-llc-which-is-better-for-real-estate-investors/

Also please feel free to Dm me or leave a reply if you have more questions.

Podcast #109 here on BP will also give a nice high level overview.

@Ryan Seib Great question. It's the same reason two individual LLC's aren't bridged. The law says they are separate entities. So therefore one LLC cannot affect another in that scenario. Each child series is considered its own separate entity.

@M Saly You may find that there are quite a few different attorneys that will be able to help you in your quest.  I have written an article that may give you some guidance as you move forward with you selection:    https://www.biggerpockets.com/blog/questions-new-investor-attorney/

I would be happy to help you with any questions that you have about a Series LLC. Feel free to reach out via DM as needed.

@Thomas Hage Typically my clients will choose to place one property in its own child series within a Series LLC. This provides optimal protection as you achieve separation of assets. You can check out Podcast #109 or review this article to learn a bit more:
https://www.biggerpockets.com/blog/the-traditional-llc-vs-the-series-llc-which-is-better-for-real-estate-investors/

Also feel free to leave a reply or send a DM.  Happy to help with any questions you may have. 

@Joe Polyak Hi Joe. There are of course many factors to consider, but in general if you are looking for a way to protect your assets while not encountering the burden of the $800 fee that CA imposes there are other options such as the Delaware Statutory Trust.   

The DST is not obligated to pay the $800 franchise tax mentioned above, and can contain as many assets as you like. The DST is viewed as an estate planning tool, and therefore exempt from the far-reaching corporate tax laws set forth by California's FTB. A properly set-up DST will both protect your assets and bypass the burdensome franchise tax that would be levied against a Series LLC.

There are some requirements that go along with the formation of the DST, but if you are planning on doing more investments into the future than the DST is a solid investment.

This isn't legal advice, just my opinion as a real estate investor.  If you have any specific questions feel free to leave a reply or send a DM.  

There is also an article that I published recently that may give some additional insight when choosing which direction you want to go: https://www.biggerpockets.com/blog/california-real-estate-investors-delaware-statutory-trust/