LLC for Multi Family Property

[Vivek R.]

Hi,

I just bough my first 6 fam unit in RI. I am thinking of forming an LLC soon. I am wondering if folks can answer few basic questions :

1) I am based in MA - Should I form LLC in RI or MA?

2) Is forming LLC is a prudent think to do to reduce personal liability ?

3) Will I have to file return for the LLC every year ?

4) What will be the process of transferring the deed from me to the LLC? Can I do it myself ?

[Greg Downey]

Preface, not an atourney, but these are pretty simple/generic answers.

1. You need to form the LLC in the state that the property is in. So.....RI

2. LLCs are widely accepted as great ways to limit personal liability. Always consult an actual atourney

3. Yes, you have to file a return for the LLC every year. This is part of running a business.

4. You can typically transfer the title to the LLC through a title company for minimal fees. You will want to do some research here and make sure that you are comfortable with the (albeit very low) risk of triggering the DOS clause that is in most mortgages.

Information about LLC formation and the basic ins-and-outs is readily available all across BP and in the podcast. I would recommend taking a bit of time to research and you should get most, if not all, of these answers and more.

[Christian C.]

@Vivek R.  I just recently received some advice on how to structure my incorporation.  I will share what I've learned but this does not count as legal or tax advice nor a complete answer to your question.  You will have to seek (and most likely pay) a licensed professional to work out the details.  This is only intended to give you a guideline to direct your conversation with these individuals.

Incorporate an LLC with S-Corp designation that will be your main business. I use this term "business" loosely because most people become "owners of a new JOB" and not a business depending on how you operate it. But that's a whole other conversation.

Now here is where I get different answers and view points:

You buy the investment property, now what?...

LLP - Limited Liability Partnership - Your personal name is listed as the Limited Partner and your LLC is listed as the General Partner. This is where you name it for example: "123 Main St LLP" This provides good asset protection and a bit of privacy. Now, here's where it gets a little tricky but I believe if you get a qualified tax company that deals solely in real estate tax accounting, they should be able to offer discounts on processing a portfolio of properties tax returns as you begin to grow. The head aches involved with (I believe) setting up this way is that separate tax returns need to be filed for each entity established. This is a great time for a tax professional to chime in to correct me where I'm wrong. This option still seems to be the best option in my opinion.

LLC the property itself - not advised but often the most used by investors. Definitely, have to file a separate tax return and your personal info is listed on the state incorporation website if your state has one. you do something illegal with your LLC and your personal assets become fair game anyway. Google "piercing the veil".

Now here's the one where it sounds great on paper but I'm sitting here like...ehhhhh

Creating an Irrevocable Real Estate Trust for each property where the grantor (you) give the trustee (your LLC) full benefits of the property. Now you will have to talk to a tax professional and a lawyer about how this truly benefits you but it was explained to me as a major benefit. One of the conveniences of this is that you file one tax return. Here's where I see a major drawback to this... I asked, what happens if there's a lawsuit from a tenant on a property (let's say I own 4). I didn't like the answer at all. I was told that the LLC will have to become something to the effect of a nonperforming entity. (any help on properly classifying this will be appreciated) And then you have to form a new LLC to become the trustee of the other 3 real estate trusts that you want the original LLC to be replaced. My first reaction was..."are you kidding me?" Imagine building your main LLC's reputation to have to restart all over from scratch because 1 property had a lawsuit. I'm not liking that option at all. A potential work around would be having your main LLC separate and then creating an entirely different "throw away LLC" to be the trustee of these trusts, but that seems convoluted. I see the value of Real Estate Trusts but this set up seems a little too sketchy for my taste. Maybe having the LLP as the trustee. You still may need separate tax returns, but you gain the anonymity the trust offers.

Some states offer what's called "Series LLC" in which you have a main LLC and then each property can obtain its own LLC designation under the main LLC. Some states prohibit them, like California. If you find a bank that allows you to open up bank accounts using a series LLC, let me know. From what I understand, most major banks will not allow them.

At the end of the day, your decision is based on what your ultimate goals are. I personally have a vision of where my real estate investment company is going to be in the future, so I'm developing a plan and path based off where I intend to be in the future. I don't want to have to back track after awhile and restructure all that I have because the inevitable (aka; Lawsuit) happens. You might just simply want to set something up that protects your personal assets from this investment you purchased. Then a simple LLC might do the trick. Just make sure you don't use your business debit card to purchase groceries one day because that's where you create an entry point for a lawyer to pierce the veil. Hope this helps.

[Ann Bellamy]

I agree with Greg Downey on #1 and #2, and will add the following:

3. If you are the sole owner of the LLC, then the IRS will consider it to be a disregarded entity and it will go on schedule E of your personal tax return. If there is more than 1 partner on the LLC, you will need a separate tax return

4. Can you do the transfer? Yes. Should you do it yourself? Unlikely. Transferring the deed to your LLC is somewhat more complicated then Greg's explanation. While the mechanics are easy, the repercussions can be significant. Since you are new enough to not understand the process yet, I'd suggest you use a title company or attorney. Once you transfer to an LLC, you will need different property insurance. Business Owners Policies are much more expensive than residential property insurance. This change will notify your mortgage company, which may trigger the due on sale clause as mentioned about.

[Todd Dexheimer]

You do not need to form the LLC in the state the property is in, but you can. The issue with filing an LLC in RI and not living there is that you have to have an in-state office. Most people choose their property managers office, but then they get all the IRS mail and LLC related mail. If you fire them, then you need to change the address as well. I file my LLC's in the state I live in and then file a foreign filing to do business in whatever state I choose.

[Vivek R.]

Thanks all for your responses. 

I was about to file it in RI after reading your responses until response from @Todd Dexheimer about forming it in the state that I live in. But if I have a Registered agent in RI then I can form the LLC in RI.

I am getting a good deal at https://www.incfile.com/. They will provide me an registered agent for 1 year and then $99 for year after. 

Regarding the deed transfer : I was reading this : https://www.legalzoom.com/articles/how-do-i-transf... and seems to be an easy process. Attorney or title company might not be doing something especial. 

Just to give some more information here: The property is not under any mortgage for now - once I form an LLC I will finance it.

[Todd Dexheimer]

@Vivek R. The foreign filing is way cheaper that paying for a registered agent and you will still pay taxes that you live if you are a single member LLC or multi-member with all owners living in the state. I don't know of an advantage in filing the LLC with RI.

For deed transfer, it is a simple quit claim deed into your LLC. You could do it yourself or pay a title company to do it. I have done it several dozen times.

[Percy N.]

Vivek R. , people get all caught up in creating an entity because some guru asked them to do so.

Have you considered buying in your name and getting a $1mm or $5mm umbrella liability insurance?

LLCs are fine but have down side like extra filings, harder to get funding, etc.

Just an alternate thought....

[Vivek R.]

@Todd - Thanks ! Not sure from legal perspective its advantageous to have a company where the property is. I see many people doing it. Not sure which is the right way. That was the reason I came to this forum for help. 

@Percy - yes I do have $2mn liability insurance on that property. Do not have any umbrella policy though. 

[John Mocker]

Vivek,

If you go the LLC route, definitely speak to an Attorney about the do's & don'ts on how to set it up and how to keep it at arms length from your personal accounts to keep a claimant from piercing the corporate veil. If you chose to add an Umbrella make sure that the six unit is included if you go with a personal Umbrella policy (most companies will only do up to 4 families). You can get a commercial umbrella policy but that will not cover your own residence and autos just the commercial properties.

[Scott L.]

If you create a LLC in Mass, you will just have to register it to do business in RI, which involves having a registered agent in RI anyway. It's usually simplest to create in the state you do business in, not your state of residence. For >4 units you probably should hold it in a limited liability entity. Your personal umbrella policy will usually not cover what is considered commercial activity. Unless your situation is more complicated than described, I'm not sure why you would form multiple entities, trust, file as s-corp, etc, or even a Series LLC. You have only one property to put in it....

My personal opinion is don't over-complicate it. Open a RI entity, title the property in the entity name, and operate it separately from your personal finances. Carry commercial insurance and work with a RI attorney.

[Vivek R.]

Thanks all for valuable inputs. Really appreciate your and your thoughts on my issue. I am going to open the LLC in RI and then transfer the deed to that.

[Matt Horwitz]

@Vivek R., @Greg Downey is correct. You are doing business in RI and should form the LLC there, not where you reside. LLCs should be setup where they are legally doing business (which may or may not be where you reside).

The comment about setting up a Domestic LLC in Mass. and then registering as a Foreign LLC in RI makes no sense. The point being made is that you'll need an "in-state office". You don't need an office in the state. Just hire a Commercial Registered Agent (or use a friend or family member's address in RI). You're already talking about working with IncFile. Their services are $99/year. Good company.

Note: you'd have to pay for Registered Agent in RI even if you first registered in Mass., then foreign qualified in RI (Foreign LLCs still must have a Registered Agent).

Additionally, forming an LLC in Mass. costs $500 by mail of $520 online. Plus, their Annual Report fee is the same ($500 by mail or $520 online). Keep a domestic LLC in RI. It's far easier and far cheaper.

Regarding IRS mail and LLC mail...

- IRS mail: The IRS doesn't need (nor care about) your Registered Agent address in RI. It doesn't apply anyway. They just need the state of organization listed. Give the IRS your mailing address in Mass. The IRS mailing address and LLC Registered Agent address do not need to match.

- LLC mail: List your RI Registered Agent's address in #2 of the Articles of Organization. For #4 (principal office address), just list your Mass. address. IncFile will scan any mail to your online dashboard. Anything else will be sent to your Mass. address. Use your Mass. address for other online/business registrations to funnel your mail there.

Hope that helps ;-)

[Matt Horwitz]

Further, do not trust a LegalZoom article on how to transfer title and register the deed. Hire a title company. It's not expensive at all.

[Vivek R.]

sure Matt. Thanks for your tip. I have visited your site. Its very informative and impressive. Thanks for reading through my issue and sharing your suggestion. 

[Jeremiah T.]

@Todd Dexheimer the quit claim deed does not qualify as a "sale" as @Ann Bellamy pointed out? I understand such a transfer could trigger the due on sale clause requiring the note be paid in full when transferred from the owner's name to his/her LLC. Is that somehow mitigated?

[Todd Dexheimer]

@Jeremiah T. sure it could, but will it? It has not yet for me since 2008 and 2009