Managing multiple LLC's

[Dave M.]

Not sure if this is the right category to post in, but I have a general question about managing multiple LLC's for rental properties. If you hold rental properties in individual/separate LLC's for privacy & protection purposes, what's the best way to handle income & expenses for each? Is it recommended to have a separate bank account in the name of each LLC? Or could you setup another LLC as a management company and run everything through that?

Also I'm a bit unsure how to handle the initial investment in the case of an LLC being formed to purchase property and then subsequently build a new property that will be used as short term/vacation rental. Obviously, the LLC owns nothing at first, so money has to come from somewhere. We are paying cash to purchase property initially, getting a loan to build, and then spending funds to furnish the new properties. This money has to come from somewhere. Do we just record it in the operating agreement as the initial capital contribution from each member?

[Jonathan Twombly]

The purpose of an LLC is limited liability. That means that a creditor can only pursue your interest in the LLC and nothing else. The more that's under the LLC, the more the creditor can reach. So that argues in favor of one LLC per property.

If you co-mingle funds between yourself and the LLC or between LLCs, you are ignoring the corporate separateness of the LLC and providing grounds for a creditor to "pierce the corporate veil" - a fancy way of saying that they can ignore the LLC, too, and reach the commingled assets as well.

So, if you are going to bother having an LLC, it's critical to observe the property formalities, like separate bank accounts and hiring bookkeepers and accountants to keep your books and tax records in good order.

Presumably, you are in this business to build long-term wealth. At some point, your real estate holdings are going to be the biggest asset you own -- bigger than your personal residence, car, etc. If you are so worried about protecting your wealth that you are going to form an LLC, it makes absolutely no sense to undermine your own efforts by putting all of your biggest assets into the same LLC. If Properties A, B, C, and D are owned by the same LLC, then a creditor against Property A can also reach Properties B, C, D. So it's best to keep them separate.

By the way, the cost of preparation of tax returns and financials is not going to be driven by how many LLCs you have but rather by how complex your holdings are. If you have a lot of properties and they are all held under one LLC and everything is commingled, it could take your accountants a lot of effort to sort through your books and records, driving up the fees. If you have small properties each in its own LLC, these are not very complex assets and will not eat up a lot of fees to report.