Can you run properties as "one business" while in separate LLC's?

Question

I've talked to accountants and tax agents and no one seems to think this is a normal situation, but my understanding from the BP world is that people do this all the time - am I wrong?

I want to own my properties in separate LLC's for asset protection, but operate them through one "business" name that I can use for all accounts/transactions (think: Google Voice, email address, web domain, one credit card, paying all the contractors, property manager, etc.) and that one "business" is an LLC separate from the property LLC's.

However, my tax agent basically told me this doesn't work because the property LLC's own the property and the expenses for that property have to fall under that LLC in order for expenses to offset income for taxes. Otherwise, my separate "business" LLC has all the expenses but no property income to offset it.

That explanation makes sense, but how do other people set this up?? Is anyone else operating in a simplified manner where all your work is under one business but the assets are protected separately?

Not seeking real legal or accounting advice, just want to pick your brain.

John B Clark · Answer

One strategy I’ve heard of is, like Brandon wrote, one LLC per so much in equity or property value.  So, maybe 3-5 in an LLC until they reach your threshold, then start another LLC, etc.  And it’s important these LLCs are in the same state as your properties. Then, have a limited partnership own the LLCs and make that your operating company. You pay all bills and take your personal distributions from the LP.  This still allows you to have one tax return because everything will ultimately flow through to your personal tax return, but provides for better asset protection.

As you know, LLC means “limited liability company” (limited liability is in the name) and most of the time they are disregarded entities for tax purposes. However, this can (not necessarily based on how it was set up, but could) result in limited protection. The same thing that gets accountants excited makes lawyers nervous, which is why I believe you need both in your corner working together.

Check out the Asset Protection Counsel. Depending on your net worth and other assets, they could be well worth your time.  I’m not affiliated with them, but I was a practicing attorney in another life, so I do understand what they’re talking about, and the limits to protection and LLC provides, and how some here might rely on the LLC a bit too much. It’s just important to understand the benefits and potential limits to anything you do.

Brandon Rush · Answer

Hey Rebecca,

Yes this is possible as I know other investors (not myself) who are doing this. You can create an LLC for each of your properties and also create a management LLC in which all of the operational funds flow through. On acquisition, I would say work directly within the property's LLC. Another option is to not put every property into an individual LLC, but group multiple properties per LLC. I have heard that $1 million in property per LLC is fairly common (assuming you are looking at properties of that value). Sorry this was not very helpful, but figured I give you the little knowledge that I know.

Good Luck!

Sylvia B. · Answer

All income and expenses (including depreciation) are recorded by unit. Each of the RE LLCs owns multiple houses, but the income and expenses are not just lumped together. The LLCs are considered pass through entities. They do not file returns.

The profit/loss for each unit is recorded on the appropriate form and filed with our partnership return. (I don't remember the particular form number, my accountant takes care of that.) On the partnership return all the numbers are totaled, giving a total profit/loss for the investments of the partnership. Each partner receives a K-1 from the partnership return, which details that partner's share of that profit/loss. The numbers from the K-1 are entered on the appropriate lines on the partner's return.

I use QuickBooks to track my income and expenses. The "class" function makes it easy to keep everything sorted out properly.

One other thing -- Depreciation is not something that an entity "gets". Instead, think of it as an expense. Each investment (house/apartment/unit) subtracts all expenses related to that investment from its gross income to determine net (taxable) income.

Rebecca Pantschyschak · Answer

Thank you Sylvia! So how do you categorize expenses for the properties when you file taxes? Do they go in the Management LLC and if so how do you count them as expenses towards the property if the property is owned by RE LLC? Which entity gets the depreciation for the property and if it's in the RE LLC (because that one owns the property) then RE LLC has no income to offset the depreciation?

Sylvia B. · Answer

Here is our LLC structure:

All real estate is owned by one of the 3 RE LLCs. They have no other assets. The Management LLC acts as the public face of the company. It acts as Landlord, collects rents, screens potential tenants, hires and pays contractors, pays all bills, etc. It has no assets. The Partnership LLC is the sole member of the other 4.

Can you run properties as "one business" while in separate LLC's?

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