Accounting structure with holding/parent & child LLCs?

Question

Hello. Is there a generally accepted best-practice for handling the accounting for this?

Say I have a holding/parent LLC, which is the single-owner of a few sub-LLCs, each of which owns several properties from the state where it was created.

Each sub-LLC needs its own EIN & checking account, ofc, so it's a clearly separate entity (to achieve the isolation goals vs it's 'siblings') and is listed on the titles to the properties it owns.

Do you generally have the sub-LLCs also be named on the mortgages for those properties, pay for maintenance and capExp, and receive rent from it's checking act/CC, and hence that's one set of books in QBO?

OR

Can the parent LLC be the entity that took out the mortgage, makes the mortgage payments + receives rents? In which case, it'd be the only entity that actually has activity on its books, so you'd only need one QBO account? That seems simpler...but maybe it violates the notion that the holding LLC is actually distinct from the child LLCs? Would it allow the holding LLC to establish a credit rating and track record such that it could at some point quality for mortgages without me having to put my personal credit rating in there and personally be liable for the loans?

Or am I over thinking this, each sub LLC gets it's own set of everything, takes loans against the properties it owns, and the notion of 'business credit' in this context is irrelevant?

Nathan Grabau · Answer

I am not a lawyer and this is not legal advice, but as I understand this: You probably do not need what you are calling child LLCs. Having an extra single member LLC in-between you and the LLCs that your properties are in tend to not practically offer you any additional protection. If a judge allows for the first single member LLC(your "child" LLC) to be pierced, there is virtually no reason to believe the judge will not allow the "parent" LLC to be pierced and you to be liable. I did one of my deals with this structure with LLC's before I knew this was not helpful and just created more legal expense, and my mortgage company just made me sign personally, as the holding company LLC, and as the LLC that owns the paper for the loan.

The BP Podcast Episode 595 goes into great detail with an asset protection expert, the cost of each level, and about when each level becomes acceptable. I wish I would have listened to it before I went LLC crazy thinking I was somehow creating a benefit for myself.

With regards to your accounting question, it is probably good to make sure that you have some way to separate your properties to compare their performance over time. I do this in Quicken, without needing multiple subscriptions, but this is something you should be able to do in other software, and I know that quicken is only a temporary solution as my portfolio has gone from 1 to 11 units in the last year.

Another note on going LLC crazy, it creates some really great compliance costs. From needing registered agents if they are in states you are not in, to needing to register as a foreign entity. Each of these things will tend to have annual legal costs.

BP 595 should be on your to do list before opening LLCs, will give you a much better idea of how LLCs can and cannot protect you.

Andrew C. · Answer

I should have clarified - the holding company (top layer) isn't for additional asset protection. It's for anonymity (WY). I'm 100% comfortable with an extra 200$ setup fee and ~150$ / year for annual filing+RA to ensure casual internet search doesn't turn up my name / address on the title to the rental properties. (I'm aware it doesn't change tax handling and that anonymity isn't a way to avoid the gov't finding me, avoid discovery in a lawsuit, etc). See, for example, diagram 18.1 in 'The Tax and Legal Playbook' by Kohler, which looks just like this.

Since it's there, anyway, I was wondering if I could move all the transaction processing into it as a way of consolidating the overall picture and saving 1K/year on additional QBO subscriptions. Unless you're going 1 property / LLC (which I agree is unnecessary), you already need a way of sorting out the various properties within the same set of books to understand how they're individually doing. QBO seems to have decent ways to do that, so the structure doesn't seem to introduce any new requirements there.

Andrew C. · Answer

I don't think there's any reason to have a new LLC / property, since there's little equity in them for the first many years, but wether or not to put them in an LLC at all seems like less a question of the # of properties than it size/type of the other assets you have that someone might be going after. Insurance is essential and great, but there are many categories of things it does not cover.

Greg Scott · Answer

That is a lot of structure.  Each LLC needs to be properly separated from the others financially,  and corporate formalities need to be completed for every LLC.  If you don't do those things, you might as well not have the LLC because an attorney will pierce the corporate veil quite easily.

There is no standard I've seen, but your plan is more to one extreme. Most investors I know put single family houses in their own name (with good insurance) so they can get agency debt.  Once they have more than 10 properties and are getting portfolio loans they shift some into an LLC.  They might create a second LLC once they feel they have too many of their assets in the first one.

Accounting structure with holding/parent & child LLCs?

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