Is this the proper way to run a portfolio with multiple LLC's?

Question

Hello everyone,

I'm a single investor with no partners.

I started by placing my 1st rental property into an LLC (for this example, *JOHN SMITH PROPERTY INVESTMENT, LLC*).

I just purchased a 2nd rental property last week with this same LLC.

These 2 rental properties have total equity of about ~$1.5M (both are owned outright). Property 1 = $750k; Property 2 = $700k.

I told my RE lawyer this and he said that I should really have each property in it's own LLC, since if something goes down at Property 1 and I get sued, they can not only go after the equity in Property 1, but also that in Property 2. I have insurance either way, but he said it's still best to split them up, with each having their own LLC.

My plan is to create a new LLC for each one:

-123 MAIN ST, LLC

-123 GREEN ST, LLC

...and then use my original LLC as the "Holdings Company", which then owns those 2 LLC's, and any additional properties I acquire.

As of now, I have 1 business credit card and 1 business account for *JOHN SMITH PROPERTY INVESTMENT, LLC* -- this makes things easy from a bookkeeping standpoint.

I've started doing some renovations on each property and have so far just ran everything through the 1 business credit card and business bank account -- keeping track of all of my invoices, etc.

Even after I split up the properties into their own LLC's, is it safe to continue doing things this way? I can't imagine it making sense down the line once I have say 20 properties and 20 LLC's, to have a stack of 20 credit cards that I'm juggling.

As long as I keep track of what expenses belong to which LLC, is it safe to continue running all of the payments and credit cards through the holdings company and then just divvy it up during tax time?

Will this expose me to liability?

Hannah Vohs · Answer

It sounds like you’ve got a solid plan in place for protecting your investments and managing your rental properties efficiently. Your approach of setting up separate LLCs for each property under a holding company is a common strategy to limit liability and protect the equity of each property individually. Here’s some insight into your questions and a recommendation to consult with a real estate lawyer for confirmation.

LLC Structure and Liability:

Your real estate lawyer is correct in advising you to separate each property into its own LLC. Here’s why:

• Liability Protection: By having separate LLCs, you limit the liability to the assets of each specific LLC. If a legal issue arises with Property 1, only that property’s assets would be at risk, protecting the equity in Property 2 and any other properties you may own.
• Asset Isolation: Isolating each property in its own LLC helps protect your assets from creditors or lawsuits targeting a specific property, thereby providing a more robust legal shield.

Financial Management and Bookkeeping:

Regarding your concern about financial management and the practicality of handling multiple LLCs:

• Centralized Banking: Using a holding company’s business account and credit card can simplify your bookkeeping. You can allocate expenses to each property/LLC during your accounting processes, but make sure to maintain clear records and documentation for each expense related to the specific LLC.
• Detailed Tracking: As you scale up, accurate record-keeping becomes crucial. You might consider using accounting software tailored for real estate investors, which can help streamline the process and keep everything organized. This can minimize potential liability or tax issues later on.
• Bank Accounts for Each LLC: While using a single business account may be convenient initially, opening separate bank accounts for each LLC might be necessary as you expand to maintain a clear distinction between each entity’s finances. This can help prevent potential legal complications.
• Professional Advice: It's always wise to consult with a real estate lawyer, tax advisor, or accountant specializing in real estate. They can provide personalized advice based on your situation and help you understand legal implications or tax benefits.

Potential Liability:

Continuing to run all expenses through your holding company might expose you to some liability. Here are a few points to consider:

• Piercing the Corporate Veil: If you don't maintain clear separations between LLCs, there's a risk of "piercing the corporate veil," where courts may hold the holding company (and potentially you personally) liable for an LLC's debts or legal issues. Keeping each LLC’s financials distinct helps prevent this risk.
• Insurance: Having adequate insurance coverage for each property and ensuring it aligns with the LLC structure can also be a vital component of risk management.
• Legal Counsel: Regularly consult with your real estate attorney to ensure your structure and practices align with your protective strategy.

In conclusion, while running everything through your holding company might simplify bookkeeping initially, consider long-term implications and ensure you are safeguarding each property and your overall investment effectively. Keep consulting with professionals to make the best choices for your business.

Good luck with your investments, and feel free to reach out if you have more questions or need further advice!

Costin I. · Answer

Not a lawyer, so take all this with a big spoon of salt. But I did sleep a lot at Holiday Inn Express studying this dilemma. @John S. @Gordon Middleton @Roger Segura

• 1. Assess      first if you really need asset protection, before you get yourself into      complicated and expensive structures.
• 2. See      if Series LLC is available in your state and/or the state you are      investing in. One time deal, it will save you from paying to create LLC      every time after.
• 3. Asset      holding entities should do just that - hold the asset. No renovations, no      interfacing with public, contractors, vendors, tenants, property      management, etc. You should have a shell operations LLC that is doing that,      with a contract with the asset holding entity.
• 4. The      flow of money needs to follow the LLC structure you put in place (another      reason to have one Operations LLC). As long you clearly identify and track      the expense per property (and you can do that in Quicken, with properties,      categories and subcategories, or in Quickbooks), you’ll not need CCs and      accounts per properties.

Here are some graphical diagrams to help you on this quest (or confuse you further):

• - Asset      Protection Decision Diagram - to help assess the need for asset      protection, and what to implement: https://www.biggerpockets.com/files/user/CosIorg/file/asset-protection-decision-diagram
• - Asset      Protection Onion Diagram - what, when, and at what cost one should      implement in terms of asset protection  - https://www.biggerpockets.com/files/user/CosIorg/file/asset-protection-onion-diagram-v2
• - What      is needed for complete asset protection OR the domains that need to be      intersected to find asset protection.  - https://www.biggerpockets.com/files/user/CosIorg/file/asset-protection-spectrum-diagram
• - How      a fully implemented asset protection layout might look. -  https://www.biggerpockets.com/files/user/CosIorg/file/asset-protection-structures

Let me know if have questions or want to chat further - I can give you my investor perspective - text me at 512-368-9940 and we can chat further.

PS.  Read this book first -  https://www.amazon.com/Every-Landlords-Property-Protection-Guide/dp/1413307000 - before getting into more complicated and expensive measures of protection.

Bonnie Low · Answer

You kind of have to separate out the asset protection aspect from the banking aspect when you think about it. I subscribe to the 'don't leave much equity in each LLC' philosophy. So with properties that are paid for free and clear, you have a lot of $ someone could go after with each property even when they are in a single LLC. We also use a holding company that holds all of our LLCs and I've recently put our holding company inside our family trust. It can be a complicated structure and you need to make sure you're doing compliance on each llC and filing the property documents quarterly and annually. It's a hassle for sure, but so so worth it should something every happen.  I hear what you're saying about having multiple bank accounts to manage. This is another thing that I kind of think of as a necessary evil. I use Baselane and even though it's very simple to set up accounts and to have dedicated credit cards for each property, I do have to watch very closely that the deposits and expenditures go to the right account so I don't leave myself short anywhere. You could just have one master account, but I think that leaves you open to more complication when it comes to filing your taxes. This is especially the issue for me because my properties are in different states. I don't know that there's an easier way to do it. As you scale, you might want to hire someone to do your bookkeeping or bring on a VA to do it. In some ways, it's a good problem to have ; )

Roger Segura · Answer

Did you ever get any advice on this? I'm in a similar situation.

Gordon Middleton · Answer

Following this. I have the same question and have found answers to vary quite a bit

Is this the proper way to run a portfolio with multiple LLC's?

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Financial Management and Bookkeeping:

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