Setting up holding company after 10th LLC

[Greg Todrank]

Searched the forums, but couldn't really find an answer to my questions about setting up the accounting around a holding company.

I currently have 10 rental properties / 10 LLCs.  I have a holding company created and will be working to move the subsidiary LLCs under the holding company.  My question is more of an accounting one.

I currently pay for my bills through each individual LLC account. I'm starting to run into some issues -- for example, my insurance company only allows 7 external pay accounts to be setup. Which means I cannot add the checking account for my latest purchase to pay the insurance. This problem will obviously continue to grow.

I currently pay the holding company $50/month from each property to cover overhead costs not attributed directly to a property.

Couple questions.

- Should that $50 get classified as an expense to the property?  I've bounced back and forth between expense for property (income to holding co) and Transfer-deduction (property)/contribution (holding co).  The "expense" option will make it difficult to see the actual performance of my properties since that money really isn't "gone".  

- If I want to start having the holding co start paying the insurance for ALL my properties, do I do individual payments from each LLC to the holding co in the exact amount of the insurance? That way the expense will show properly within the LLC. My only problem with that is that it starts adding bookkeeping steps.

I appreciate any experience that you could provide.

[Michael Plaks]

Quote from @Greg Todrank:

Searched the forums, but couldn't really find an answer to my questions about setting up the accounting around a holding company.

I would not treat this forum as the place to find answers to specific legal or accounting questions. Or any other site on the Internet, for that matter. It should be addressed case-by-case with your personal accountant and attorney.

You're mixing together several issues that really should be considered separately. 

1. Keeping each property in a separate LLC. It's primarily an asset protection issue, and it's highly controversial. Some attorneys might even suggest that your approach does not work as intended. There're alternative approaches, each having pluses and minuses. I'm not an attorney, so my opinion is irrelevant.

2. Consolidating bank accounts between multiple LLCs. From an accounting point of view, it's a non-issue. Any decent accounting or property management software allows assigning transaction to specific properties and generating per-property reports. From a legal point of view, it might destroy the asset protection concept of operating multiple LLCs. Again, I cannot comment on legal issues, not being an attorney.

3. Creating a separate management/holding company. You can certainly do so, however your own mgmt company should mirror an independent mgmt company, including management contracts, actual flow of management fees, reserves, deposits and all the other formalities. You cannot have your cake and eat it, too, which would be a management company without management fees. By the way, creating a management company does not eliminate the need for separate bank accounts for each LLC. If you eliminate them, you might have an asset protection problem. You basically add one more account to those you already have, and you use that new account for consolidated bill payments.

4. Insurance. Research whether you can obtain blanket insurance policies covering multiple properties. It may not be possible across multiple LLCs though and, if available otherwise, may be a problem for asset protection. Either way, changing your structure in order to appease some arbitrary policies of your insurer does not sound right to me. Besides, you can work around those account limitations by creating a holding account just for insurance premiums, even without a separate holding company.

5. Bookkeeping. I'm confused by your concern about "adding bookkeeping steps." Seems to me that maintaining multiple accounts already creates as many if not more steps. And extra bookkeeping hassles should not be a deterrent to optimizing your operation anyway.

Returning to my earlier statement, this is a topic of a detailed (aka long) conversation with your attorney and accountant. Or a reason to hire them if not already.