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Scalable Business Planning
I am an investor located in Michigan and in the process of developing a business plan but am struggling to figure out how to set up my LLCs with scalability in mind. Below is a rough outline for both a buy/hold and flipping business. I understand a parent/holding company is the next level of protection when you have multiple LLC's. Should my parent company hold all of my real estate LLC's even if they are taxed differently (such as between the buy/hold and flip business) or are parent LLCs designed to only protect the several Buy/Hold LLC's because they are of similar taxation? I know I am overthinking this too much for the current stage as an investor, but I'm trying to work backwards from my end goal of owning 100 units.
LLC #1 (convert to s-corp once turning a 40K/yr profit as recommended by CPA) for a flipping business.
LLC#2,3,4+ for Buy/Hold business (opening up new LLC after the previous reaches 1M in equity or property is in a new state)
Parent/Holding Company - to own all LLCs or just multiple Buy/Hold LLCs as they are formed?
Property Management business- created after acquiring about 20 properties. Can this business also be shielded by the parent/holding company?
On a separate note, if my personal home and all my business is in the state of Michigan at this point, would there be any benefit to designing the business as a series outline or simply a parent/child LLC set up where the parent LLC would be created in a more tax advantaged state such as TX, WY, NV etc? I plan to grow the business to multiple states in the next 5-10 years with the 100-unit portfolio goal at 20 years.
I love the forward looking approach, however you're probably over complicating it at this stage. For the flipping business I'd set up a simple LLC since you won't have to worry about refinancing those properties. For the rentals I would purchase in your personal name (to get preferential lending terms) and then transfer title to an LLC at a later date.
LLCs are simple to create so you don't need to plan this too far out in advance, IMO. That said I would definitely consult with both a lawyer and a CPA before making a decision.
#3 All Forums Contributor
- Investor
- Virginia
Quote from @Joseph Wojciechowski:
I am an investor located in Michigan and in the process of developing a business plan but am struggling to figure out how to set up my LLCs with scalability in mind. Below is a rough outline for both a buy/hold and flipping business. I understand a parent/holding company is the next level of protection when you have multiple LLC's. Should my parent company hold all of my real estate LLC's even if they are taxed differently (such as between the buy/hold and flip business) or are parent LLCs designed to only protect the several Buy/Hold LLC's because they are of similar taxation? I know I am overthinking this too much for the current stage as an investor, but I'm trying to work backwards from my end goal of owning 100 units.
LLC #1 (convert to s-corp once turning a 40K/yr profit as recommended by CPA) for a flipping business.
LLC#2,3,4+ for Buy/Hold business (opening up new LLC after the previous reaches 1M in equity or property is in a new state)
Parent/Holding Company - to own all LLCs or just multiple Buy/Hold LLCs as they are formed?
Property Management business- created after acquiring about 20 properties. Can this business also be shielded by the parent/holding company?
On a separate note, if my personal home and all my business is in the state of Michigan at this point, would there be any benefit to designing the business as a series outline or simply a parent/child LLC set up where the parent LLC would be created in a more tax advantaged state such as TX, WY, NV etc? I plan to grow the business to multiple states in the next 5-10 years with the 100-unit portfolio goal at 20 years.
I started down this path and blew it all up after a few years as its way too expensive, way to complex and realistically did zero additional asset protection for me.
What are you starting with? You flipping, you doing buy and hold? Are you buying in your name and transferring to a LLC (which is a waste in my opnion?)
Realize for each LLC you will spend thousands per year in bookkeeping/taxes etc. whether its your time or someone elses. When you are getting started you are throwing money away for a false sense of security.
I would not start with more than 2 LLC's. One for flipping and one for owning assets. I would not start them until I had an actual deal.
Quote from @Joseph Wojciechowski:
I am an investor located in Michigan and in the process of developing a business plan but am struggling to figure out how to set up my LLCs with scalability in mind. Below is a rough outline for both a buy/hold and flipping business. I understand a parent/holding company is the next level of protection when you have multiple LLC's. Should my parent company hold all of my real estate LLC's even if they are taxed differently (such as between the buy/hold and flip business) or are parent LLCs designed to only protect the several Buy/Hold LLC's because they are of similar taxation? I know I am overthinking this too much for the current stage as an investor, but I'm trying to work backwards from my end goal of owning 100 units.
LLC #1 (convert to s-corp once turning a 40K/yr profit as recommended by CPA) for a flipping business.
LLC#2,3,4+ for Buy/Hold business (opening up new LLC after the previous reaches 1M in equity or property is in a new state)
Parent/Holding Company - to own all LLCs or just multiple Buy/Hold LLCs as they are formed?
Property Management business- created after acquiring about 20 properties. Can this business also be shielded by the parent/holding company?
On a separate note, if my personal home and all my business is in the state of Michigan at this point, would there be any benefit to designing the business as a series outline or simply a parent/child LLC set up where the parent LLC would be created in a more tax advantaged state such as TX, WY, NV etc? I plan to grow the business to multiple states in the next 5-10 years with the 100-unit portfolio goal at 20 years.
Hi how many props do you currently have ?
#4 Managing Your Property Contributor
- Property Manager
- Metro Detroit
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#4 Managing Your Property Contributor
- Property Manager
- Metro Detroit
@Joseph Wojciechowski you're reading too many "scary" articles!
First issue is an investor always has a choice for liability protection:
Insurance vs LLC setup
If you have enough insurance, you can cover any lawsuit!
Second, when doing flips you'll typically put each property in its own LLC.
If you plan to scale rentals, you can have a Management LLC that acts as a PMC collecting rents and paying expenses via its bank accounts. Then you could have each rental in a Property LLC that hires the Management LLC for management. Annually, the Management LLC would "distribute" to the Property LLCs, but it would all flow thru to your 1040 Schedule E - unless you get partners, which would require a 1065 return with K-1 distributions to the partners.
Thanks for all the info guys! I really like thinking of the holding company as a property management company. I'm going to start with a flipping LLC and get a few properties under my belt. Then convert to hopefully a 1:1 ratio of buy/sell one flip property to buy/hold for long term rental (possibly use BRRRR). That way my flip properties can fund the buy/holds. If I'm going to use a combination of hard money and conventional (maybe FHA) loans, I will need a LLC for hard money eligibility anyways. I know insurance has its place, but i feel more comfortable having a LLC as protection, especially if I'm building to 100 units.