LLC Question - Separate LLC for Managing and Owning?

Question

I'm closing on my first property soon.  It's a property I've been renting for my business for a few years, and there are three other rental units on the property in addition to mine.

Here is my LLC plan:

One property ownership LLC.  This LLC will own the property, and I will be the president.  Rent will be paid to this LLC, and bills for this property will be paid by this LLC.

One property management LLC.  This LLC will be hired by the first LLC to manage the property (day-to-day activities on the property) and I will be the president.  A monthly  management fee will be paid to this LLC by the first LLC.

My reasoning for two LLC's is this - as I acquire additional properties, each property will be under it's own LLC.  They will all hire the same management company to manage the operations.  This creates another layer of liability protection, and also further separates tenants from the property owner, because they're dealing directly with a management company.  Yes, I'm the president of both companies, and I'm also dealing with tenants, but they don't need to know I'm also the owner.

Does this make sense, or am I crazy?

Account Closed · Answer

Passive loss limitations may come into play, depending on your circumstances, but the LLC is not the problem - paying yourself (or your company) the management fee is what creates the tax issue.

Account Closed · Answer

You did not say anything about getting a good insurance policy to protect you. If the tenants ask are you the owner don't lie to them because you don't want the tenants to lie to you.

Joe Gore

Account Closed · Answer

@Derek Smith

Rental income is passive income and is not subject to FICA tax.  The rental income is taxed whether you take a distribution from the LLC or leave it in there.  If you pay yourself a management fee, you have converted some of the passive income into earned income subject to FICA.

Account Closed · Answer

Aaron K.

You can self manage without paying yourself a management fee.

Aaron K. · Answer

@Jerry W. Thanks for the info.  That makes perfect sense.

Account Closed My thought with the second management LLC was to be able to take the management income as a salary, which I would have otherwise paid out to a management company.  The rest of the rental income would stay with the property LLC's for future use.  You are right, however, about not having taxable income when it may not be necessary to do so.

Account Closed · Answer

I wouldn't bother with a management company llc.  If you are the one managing the properties, the llc will not do anything to shield you from liability for negligent management - the injured tenant will just sue you personally.  Also, doesn't paying yourself a management fee take tax-advantaged passive income and turn it into earned income?

Derek Smith · Answer

This is probably an amateur question, but I'm going to ask for my clarification.

Say I own/manage my own 4-plex. When it comes to pay bills, what's left over is technically mine as income. Now my question is this, when it comes time to withdraw the money, how do you differentiate that its passive and shouldn't be taxed or that its active income and must abide by tax laws? In the end I'm "managing" the property, so I want to make sure I stay within the legal limits and understand the difference.

Thanks to everyone leaving comments, this is really excellent information!

Bill Gulley · Answer

Spencer, I'd disagree, you have an under capitalized entity.

These can be seen as shells with no pearl, sham transactions between the same owner(s), you can get into tax issues and a good attorney will go through your entities like Grant went through Richmond.

Totally agree with Jerry W. and Jon P.

All you do with multiple entities is multiply your management efforts, your entity expenses, your accounting, your filing fees and increase the probability of messing up in the administration functions to allow your empire (with on or a few properties) to be demolished.

Search "LLC liability" or "LLC protection" and start reading.

Form entities for business purposes, not primarily as liability polys, get insurance. :)

Account Closed · Answer

@Spencer Wilson

Bad advice, It is not hard to find out who is behind everything.

Joe Gore

Spencer Wilson · Answer

@Aaron Kushner

If your goal is liability and asset protection then perhaps you should look into setting up a holding and operating LLC. The basic idea here being that you conduct your business through the operating LLC but your properties are all owned by the holding company and are leased to your operating company. This way, any legal troubles that your operating LLC gets into has no bearing on you or your assets because the operating LLC technically owns nothing. The holding LLC doesn't have any business dealings so by default it can't get itself into any trouble.

This could also keep you from paying a management fee (earned income) and keep it all passive (FICA exempt). Plus, it keeps you from having to establish an LLC for every single property you acquire which can eventually turn into a hassle.

Hopefully this gives you something to chew on and think about. Hope it helps in some way.

LLC Question - Separate LLC for Managing and Owning?

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