Structure Multiple LLCs

[Deborah Burian]

When we formed our first company, about 10 years ago, we chose an LLC format and that has worked out fine. We carry umbrella liability on the LLC and each property is added to the policy as they are purchased.

Based on my prior business life, I understand very well that one should have liability insurance of at least the value of the assets being protected.

However, past a certain size, say 10 properties, it seems prudent to create a second LLC, third LLC, etc, in order to keep liability spread out a little and to in effect, increase liability coverage. For example, a common contemporary liability value is 1mil/1mil. Once the asset value passes the available insurance, the company is in a somewhat riskier position. Hence the subsequent LLCs then one can purchase separate liability policies.

For this and other reasons, it's time to start a second LLC. That is in process. While discussing it with the attorney, he also indicated that it might make sense to create a third entity to be a management company, use the prior LLCs essentially as holding companies and manage all props by and through the management company. On the surface, that makes perfect sense to me, subject to approval by the tax accountant. As an aside, let me add that Oklahoma does have series LLCs but they are untested in our courts and there is no consensus on how these properties should be titled. Not wishing to be the test case, I passed on the series approach.

Now I have the question "how does the income flow." It seems as though revenue would come to the management company which would pay bills/expenses, extract a management fee and return the balance if any to the holding company capital and/or retained earnings accounts. Should a major expense, a la a roof arise, the management company could invoice the holding company for costs in excess of income and the holding company could transfer funds, write a check, whatever makes sense. At the same time, this is a modestly complex structure and raises the question of am I over complicating things.

I would deeply appreciate the input of any more experience members.

Thank you in advance.

[Bill Gulley]

You do not need this as a subsidiary business structure. Don't tie the two companies together. Put houses 1, 2, 3, 4, 5 under ABC LLC, then have another company on its own, XYZ LLC that holds properties 6, 7, 8 ,9 an so on.

However, for one thing, you aren't in New York City or San Fransisco, you're in pure red blooded Republic Party held corporate loving, consumer despising, tenant hating Oklahoma! Do you have any idea how many people you will need to be responsible for thier deaths to get hit with a million dollar liability suit?

In no, way shape or form will the average Joe The Plumber in OK. go through a life value analysis and justify a million bucks, juries in OK are not arbitrary liberals, least not all 12, they aren't in my neck of the woods either!

Your risk assessment is flawed IMO by not considering 1. The local political attitudes of business, 2. The public attitudes and how the public views liability, do they assign all the blame to one or the other or are there factors of contributory negligence, where the mother should not have allowed her three year old to play on the roof? 3. What is the largest tenant/landlord liability case ever found in your jurisdiction, what's the largest liability death case from any action?
4. Are you negligent? Do you not care for the properties, do you allow dangerous conditions to exist and do you know they exist? I know you don't. So, point is, this isn't an issue of lightning hitting your tenants, you must be found negligent and liable, usually a tough case if you are a prudent prpoerty owner.

Now, consider that the insurance company will defend you against claims up to one million dollars, that includes the team of attorneys they send in to save thier butts from paying out. Good to have that instead of say 250K because the insurance company could defend you for a few days, then decide to write a check for 250K and walk away leaving you high and dry, but they won't be walking away from a million bucks.

In other words, the risks most RE investors assume in reality is no where near the wild stories heard about large awards (which are usually in very liberal areas).

Who pushes these multiple LLC strategies, attorneys who put them togther, who represent them (the LLC) the accountants who have to keep the books straight, perhaps the insurance agent who sells another policy.....the proponets of multiple LLCs have an interest in such structures, some convaluded operation that takes three hours do take care of something that could be done in 10 minutes under one company. You really don't want to get into subsidiary accounting issues over some rental properties!

BTW, say you had two companies, one screwed up and you lost, they run through that piercing your viel and hit you personally, guess what, that other company is a personal asset, the actionable cause was not insured by that other policy, you're forced to liquidate for the value to pay claims, you lost it anyway through the back door.

Get some real information on your area, what are the actual awards, then assess the real risks, not imagined so that we run off with paranoid thoughts and spend more money feeding those that promote this parinoia of legal liability.

Deborah, my dearest state neighbor, not jumping on you, but addressing the entire investor community with similar thoughts of stacking up LLCs taking things beyond reality. See a good attorney, not a guy who sells forms. :)