Transferring Cash between LLCS

[Raven Ye Mahar]

Like most people, I created a bunch of LLCs for investing in RRE. I had done a pyramid structure where the top (parent company) owns the two bottom subsidiaries (one for management, one for holding properties). My question is two folds: 

1) Can I collect and report all of the rental income from the properties into the Management LLC even though the Holding LLC is the one holding the properties? 

2) Once the rental income is consolidated in the Management LLC, how do you transfer those income funds upstream to the top parent company? Does this trigger another income tax? Assuming the income is already reported and taxed at the Management LLC level.

Would appreciate your thoughts and guidance if anyone has been on a similar scenario!

[Ryan Coon]

Hi Raven,

First, while you can collect rents in the management LLC, in particular if you have a management agreement between the management LLC and the property holding LLC, this income would not general belong to the management LLC. Just like when using a third-party property manager, the rents belong to the LLC that owns the properties being rented. This wheels the management LLC could deduct a management fee from the rents, the reminder of the rents would ultimately belong to and be reportable to the property holding LLC. Failure to make this distinction will likely nullify any real legal separation or distinction between the two entities and may even negate any asset protection benefits provided by the LLCs.

Second, as long as the management and holding LLCs are disregarded for tax purposes (e.g. by being single member LLCs with no corporate tax election) then the holding and management companies can simply transfer the funds to the parent company. This should be classified as a "member draw" or "member distribution". These transfers are non-taxable again as long as the LLCs are disregarded. 

It's also important to note that if all of the LLCs are disregarded then there are no taxes or tax returns for the LLCs. Income and taxes would simply flow down to the owners personal tax return. Again, this all rests on how each of these LLCs are taxed and my response assumes disregarded taxation on all LLCs.