Create an LLC for Managing My Properties?

Question

{LONG POST WARNING}

I've researched this topic in a dozen other BP posts-- but I could use some additional input from the experiences and opinions of seasoned investors.

(And please, no "consult with an attorney" responses. I know that. However, I'm not going to pay $250 per hour for basic questions for which attorneys themselves have differing opinions. That's what the BP forums are for.)

Is there any value in creating an LLC for the sole purpose of managing the financial aspects of managing rental properties?

Here's my thinking:

1) Creating an LLC for property management (PM) would establish a solid business history for the LLC and make the LLC to be a better candidate for obtaining credit and financing within a few years if I wanted to later purchase or hold title to property under the LLC.

2) The LLC would have an EIN which would enable the LLC to open/maintain its own checking account which would receive/maintain rental income/deposit separate from my personal accounts. (I realize I could achieve the same result by simply creating another personal checking account to handle all rental-related transactions).

Do I save on sales tax if buying products/services with an EIN? (in FL)

From a tax standpoint, I understand that a single-member LLC has "pass through" taxation anyway, so any distributions from the LLC checking account to me, as the sole Member of the LLC, doesn't have any tax advantages, but only adds a layer of complexity.

3) If I wanted to deduct the "costs" of running the rental properties, would that be best done on my personal taxes by taking deductions for home office/saving travel expenses or do I need a separate business entity for that? If so, what kind? Or, are the potential deductions simply not worth the hassle?

4) The "To LLC or Not to LLC" topic is widely debated and covered in the BP forums, but, from a liability perspective, I imagine a PM LLC is worthless?

To manage my liability risk/exposure, I wanted to get your thoughts on my current plan:

#1 Be a fantastic, responsive, and pro-active landlord (who keeps excellent records).

#2 Conduct thorough and effective tenant screening.

#3 Create a strong lease which clearly outlines the expectations and responsibilities for the tenant and the landlord.

#3 Acquire plenty of insurance coverage and an additional umbrella liability coverage.

Many thanks in advance for your thoughts and responses!

Mark...

Steve Vaughan · Answer

I chose to establish mine as an s-corp.  I only manage for myself.   I like 'active' income with no assets in an s-corp, 'passive' income with assets in an LLC.  Sure you can elect to be taxed as an s-corp in an LLC, but corporations are 1099'd less often. Corporations can also establish defined benefit retirement plans for their shareholders.

Not an accountant or attorney, just what I have done. Hopefully a tax professional will comment on tax stuff for you.

Like @Joel Florek asks - are you going to be managing for others?  Another cause of an s-corp if so.  Good luck!

Joel Florek · Answer

@Mark J. Thanks for the response. The way I look at it, when you begin, I would  not worry about setting up a separate LLC or s corp for a property management company especially if you are contemplating handing it off to someone else. It adds a layer of complexity and you can still claim vehicle, meals, supplies, and other items under your business expenses for the LLC.

However, if you plan on hiring in as an employee or contractor someone to do property management and you own many LLC's for your different properties I would consider having a separate LLC for the management company. I would do this to group all the misc expenses that you can claim as business expenses but don't want to try and split up on each property. It also makes sense to pay for the contractor or employee expenses through this entity. Structuring as an S corp may be more advantageous here and I would love to learn more about that. Thanks for the suggestion @Steve Vaughan

Also, if you are going to be partnering with other investors, but plan on performing the management duties it allows you to separate the management expense out from the expenses you have between you and your partner and that specific property. I am purchasing a property from a partnership that structured like this.

Matthew Kreitzer · Answer

I know you said you didn't want to hear this, but for every other question you had except this one, you can get significant advice and guidance on from Bigger Pockets. Unfortunately, answering this question would be the provision of legal services in a significant number of jurisdictions. Compliance issues for asset protection are something that can only be discussed with a licensed attorney in your particular state. Because state laws are so varied, no one here is anywhere near qualified enough (aside from a local attorney) to give you asset protection advice. At most, a foreign attorney could apply these questions to their particular jurisdiction, but that is by no means good guidance for your particular case.

Generally speaking, from a Virginia perspective and not from any other state's perspective, the plan you propose would generally protect you from a great deal of unwanted attention from the Courts. Documenting everything, in the state of Virginia, is the number one way a landlord can protect themselves. There are some additional things that landlords can do, in Virginia, that protects them. Choosing a particular style of communication and sticking with it (for evidence reasons), having an eviction plan in place that you follow to a T (developed in conjunction with a local landlord/tenant lawyer), and generally refraining from making exceptions to your written lease.

For information beyond that, or how such things may apply in your jurisdiction, you must speak with a local attorney. I don't say this out of some professional protectionism, I say it from a legal perspective. Many jurisdiction, including my own, have the power to throw people in jail for giving unlicensed legal service.

NOTE: This information is not legal advice for anyone in Virginia, and the Virginia State Bar may view this post as legal advertising.

Argerous Filosofos · Answer

MArk,

There are a number of different ways i think to approach this matter, I have been an investor for over 40 years and have gone thru a number of different scenarios. If your just starting out and planning on building your portfolio and business I might suggest this as a course of action

Start out with 1 LLC as your primary LLC, Buy your propetry, do whatever your going to do, Manage it, Rehab i,t everything in one in the beginning (Marks REI LLC). As you get a second property again buy it in the 1st llc, rehab it and do whatever in it. Then maybe add a second LLC (Marks PM LLC) to manage the properties if you feel the need, As you add more you might add addtional LLC's as needed (Mark Holding LLC, Marks Construction LLC, Marks Wholesaling LLC) for whatever you may be doing. I would suggest not to start the LLC until you have a couple projects that would benefit from the creation of the LLC. When you begin to set these up get a series LLC instead of a single one - easier to manage. All LLC come with a cost, cost to create cost to maintain along with some recording keeping and separate checking accounts. Once one or all of these secondary llcs are set up and in use they will all be Owned by the primary (Marks REI LLC) which will manage each seperate LLC and each secondary llc will pay Marks REI LLc a management fee. All your properties should be in a seperate holding LLC

Bottom line is this Dont over complicate the issue in the beginning, Get one LLC and make it your primary, Add others as you grow, You dont need to pay the added expense until you actually have a need. Thats my opinion anyway.

If you have any questions, want to discus it in more detail give me a shout would be happy to help!

T. Argerous Filosofos

Joel Florek · Answer

@Mark J. A few questions for you.

- Is this management company only for managing your properties?

- Do you hold your portfolio of properties in multiple LLC's or a single LLC?

- Do you plan on scaling your portfolio and hiring a team to manage your own properties?

Ill give you my two cents after your response. Although I will probably have a few more questions as well... haha

Mark J. · Answer

Account Closed - I appreciate your directness. I respect that. I'll PM you.

Jacob Sampson · Answer

@Mark J.

My thoughts on your items:

1.  If you will use traditional financing you will have to personally sign for the mortgage for a long time to come.  The LLC can be the owner of the property but LLC members will be personally liable for the debt.

2. The LLC being able to open a checking account is no biggy.  You could open a separate account (as you stated) and set it up as a DBA (doing business as) the name of your property management company.  That way tenants writes checks to business name rather than your own.

3. All or most business entities can deduct those expenses.  Even a sole proprietorship can.

I am a fan of LLC to protect my personal assets from my business.  Also, because of the simplicity of the entity.  I also have an umbrella policy for protection as well.

Account Closed · Answer

I agree with @Steve Vaughan although I am not sure since for the same reasons since  he did tell us his ;)

@Mark J.

In all respect your initial post is missing some important components and considerations regarding tax strategies and asset protection as well as your duties as a PM/landlord.

IMO you would benefit from learning more about the subject because I definitely gather from your post you want to do things knowing all the facts.

I would like to strongly recommend an audio book, "Loop holes in real estate" by Garrett Sutton.  It is only $13 on amazon and an excellent source, giving you a strong understanding from which to grow.  I cannot exspress enough, with all sincerity, how much you will enjoy it.  Just my opinion.

Steve Vaughan · Answer

@Mark J.- I wouldn't own assets inside a corp of any kind.  Fixing and flipping will place assets inside it.  That's just me from what I've read from folks on BP that know much more than I like @Brandon Hall!

Mark J. · Answer

@Steve Vaughan - I like the structure you outlined: 'active' income with no assets in an s-corp, 'passive' income with assets in an LLC. So, in practice, you're saying fix-and-flip properties are best titled and run through an S-corp (my flips- at least initially- will be purchased with cash) and long-term rental holds with less equity and rental income would be held in an LLC. Does that sum up your position?

Would you agree that fix-and-flips don't necessary need the potential liability protection of an LLC?

As far as an LLC for my long-term rental holds, (and here this drifts into the LLC or not debate), since my LLC would be single-member, I'm not certain it would provide any liability protection anyway.

(for some reason my @ is now not working)

@Jacob Sampson-- I like your #2-- and that's one of my main goals, to create a business entity with its own "brand" and identity and position myself more as a "property manager" (which is what it says on my biz cards), rather than an owner. Why do that? Perhaps vanity reasons. Perhaps some level of privacy. Perhaps some level of distinction so that tenants see me more as a manager of the property rather than the owner.

@Matthew -- I appreciate your response and respect itand that as an attorney you took the time pro bono to respond). I've added three (#6-8 below) VERY good points you made to my "how to be a good landlord" list:

#1 Create and maintain a safe property for tenants (and guests).

#2 Be a fantastic, responsive, and pro-active landlord (who keeps excellent records).

#3 Conduct thorough and effective tenant screening.

#4 Create a strong lease which clearly outlines the expectations and responsibilities for the tenant and the landlord.

#5 Acquire plenty of insurance coverage and an additional umbrella liability coverage.

#6 Choose a specific medium for communication (email) and stick with it (for evidence reasons).

#7 Have an eviction plan in plan that you follow to the “T” (developed in conjunction with a local attorney specializing in landlord/tenant law).

#8 Generally refrain from making exceptions to the written/signed lease.

@Joel- RE: "you can still claim vehicle, meals, supplies, and other items under your business expenses for the LLC" -- Currently, I don't plan to put my properties in an LLC. Since the LLC only files an "informational" return (Form 1065), how would expenses be claimed/deducted? What's the value? Of course, what I'm looking for is a way to take those deductions personally to offset capital gains from rental income. (or is that not possible?)

PERHAPS-- all I need right now is a DBA so I can open a checking account, write and accept checks in that identify. Good info on that here: http://www.smartpassiveincome.com/why-you-need-a-business-banking-account-and-how-to-get-one/

Of course, DBA does nothing for asset protection, but again, as a single member LLC, I'm not sure the LLC does either.

Ah, one question just rolls into so many others! Thanks for sticking with me as I wade through this. Hopefully, this discussion will help other newbies like me. ;)

Create an LLC for Managing My Properties?

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