Do I need an LLC per house or just one LLC?

Question

I’m looking to get started in an LLC for the two rental homes, I currently have. However, I’m trying to research which option is most beneficial. Do I create an LLC per home or one LLC for both homes ?

Looking for input ....

Dylan Tanaka · Answer

@Mary Blanco are you planning I’m having a Michigan based CPA/Tax Preparer do your Michigan taxes or a CA?

Bobby Shell · Answer

@Mary Blanco my tax professional and lawyer told me an LLC does not protect me at all. Umbrella insurance will. You need to talk to your tax professional and a lawyer to make sure.

And LLC also ads more costs to doing your taxes vs. keeping it under your name and paying $x monthly for umbrella insurance.

Kris L. · Answer

@Mary Blanco

I don’t really know your risks or goals so I can only tell you my plan for me.

Each LLC will hold 5-10 individual properties with a max asset value of $2.5 mil (if I owned property free and clear).  Minor adjustments to that plan as it makes sense.

Heath M. · Answer

Not a lawyer either but in my opinion, if I was going the LLC route I'd lump multiple in one LLC before creating another.  And I wouldn't start worrying about it until your net worth was on up there.  YMMV.

Nathan Biller · Answer

First, I'm not a lawyer, so I'm not offering legal advice only explaining how I made my decision! While I'm sure there will be lots of people that disagree with me, I just invest in my own name. I read all the books that suggest one LLC per property. Warren Buffett says that you should never ask a barber if you need a haircut, and I noticed that most of the authors of those books had either esquire or J.D. after their names!

Having one LLC per property is likely the best way to minimize your legal liability. However, that comes at a trade-off of hassle and money. So, as with most things in life, the "right" answer is "it depends". How much do you value limiting legal liability compared to your time? In Michigan, it costs $50 to file for an LLC and then $25/year. In California, I think that's $70 upfront and then $800/year/LLC (again, you'd need to consult a licensed, practicing attorney in CA to confirm what I just googled about California). Then, in order to make sure your corporate veil can't be pierced you'd need to maintain independent bank accounts for each LLC and sign different management agreements for each LLC you manage with your PMs. Any co-mingling of funds would allow a good lawyer to break through all your hard work :( I found out that when I wanted to refinance the bank wouldn't allow me to do it when my LLC owned the property, so I had to quit-claim the property to myself, sign the refinancing docs, and then quitclaim it back to the LLC all while paying filing fees each time. Plus there's also the potential risk that a bank *could* call your loan because most mortgages these days have a "due on transfer" clause. The bankers I've spoken with say that in practice this rarely happens, but they *legally could* if they wanted. So for me, the additional hassle wasn't worth the benefits. You might decide that you like an LLC but not enough to have one for every single property. I'm curious to learn what you decide to do, and I'm looking forward to reading what others recommend too :)

Bob Norton · Answer

Owners of LLCs (that are taxed as sole proprietorships or partnerships) can withdraw funds or contribute funds at will and those transactions will not be considered co-mingling of funds.  So, if one property needs a new roof and another has the funds, then you can withdraw the funds from one, deposit that into the owner's checking acccount (which is called a distribution) and then transfer the funds from the owner's checking into the other LLC (which is called a contribution).  Another way to handle this is to loan the funds from one LLC to another, using a promissory note.  Where LLC owners get in trouble is when they transfer funds between LLCs without any formal paperwork (promissory note) or reimbursement (this is considered co-mingling of funds and can negate liability protection).

Sara Cordero · Answer

Thank you for the info.  I live in Oakland,  CA and was researching fees and taxes of starting an LLC in Virginia where i plan to buy property.

I was not considering that I'd still have to file everything as working from California and pay $800/yr.

That's a huge chunk in my passive income.

Thanks again

Sara

Lynnette E. · Answer

Just think about how you want to manage your money.  If each property is in its own LLC then you have a checking account for the rent for each house/LLC.  You need a new roof for one house.  You can not hit the checking account for any other property.  So, if that LLC's account does not have enough funds for a roof, what can you do?  Get a formal loan or let the roof leak.  When you combine the houses into the same LLC you can jointly use the funds to fix whatever is most pressing from all the repairs needed with the combined funds.  Seems silly to have a checking account to get one rent check a month, send one mortgage check, maybe pay for some repair.

Scott Smith · Answer

@Mary Blanco, this article identifies a strategy I have seen used successfully in California to avoid the franchise fees and regulations that were spelled out earlier for investors in California.  Another strategy is to have an operating LLC to do property management for all properties, and hold the assets in trusts that provide many of the asset protection properties of series LLC's.  In California, spending a little more setting up the asset protection plan pays off in reduced operating costs.

Katie L. · Answer

@Mary Blanco

California is a sort of beastly state when it comes to taxes and filings. Even if you create a non-CA LLC, if you are managing the business from California, you will be deemed to be "doing business" in California and therefore subject to CA taxes. California charges a minimum tax of $800 a year per LLC, and more if you have gross receipts in excess of $250k. So, if you create an LLC in another state, you will need to register it as a foreign LLC in California. Though, this process will be the same for the other state (if you created a CA LLC you will need to register it as a foreign LLC in the state in which you are doing business/holding property). This means that you will need to pay registration and filing fees in at least 2 states if you don’t buy CA property.

There are several considerations that can go into the analysis of whether you need an LLC or whether a large insurance policy will suffice. Will depend on several factors like the type of property, type of tenants, your risk tolerance, other assets you own, your estate planning, laws where the property is located, etc.

Any lawsuits would be limited to the assets of the LLC and not your personal assets (assuming you run the LLC appropriately and the corporate veil is not pierced). But, an LLC will not limit you from liability in total. You can still lose your investment in the LLC. In this regard, separating properties into different LLCs helps protect you better, but has other downsides.  If you're going the umbrella insurance route, make sure it will cover you for several things including just the routine slip and fall (like mold or earthquake). You'll also want to ensure you have a good property manager to look after the upkeep of the property if you are not there to notice anything deteriorating or which may need attention.

This article goes into a lot of the considerations about whether to form an LLC or not: https://www.mmpph.com/wp-content/uploads/2019/04/May-2019-newsletter.pdf

These are all things you will want to discuss with your attorney and CPA. If you need references for either of them in San Diego, let me know.

*This post does not create an attorney-client or CPA-Client relationship.  The information contained in this post is not to be relied upon.  Readers should seek professional advice.

Do I need an LLC per house or just one LLC?

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