LLC Property and a Property Manager walk in to a CPA Office

Tax, SDIRAs & Cost Segregation
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LLC Property and a Property Manager walk in to a CPA Office

Chris Tedeschi
Member since 2021 · 15 posts · 6 votes

Sorry, I couldn't think of a better title >_<

So, here's the question: If you have own a property which you moved into an LLC AND you have a property manager, managing said property, how should payment of his services work?

So, before our home was in an LLC, all rent went to the property manager, he sent it to us and removed his fee from it and any additional items (lawn care costs, HVAC repairman, etc...)

Now that it's in an LLC, does the rent he collects need to come to us completely first and we pay him for his services from our bank account?

To me, its an accounting question and I'm not sure if legally it all needs to come into our account and then be paid back out or not.

Can someone give me an education on this please.

Thanks,
Chris
 

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Mike S.
Investor · Broward County, FL · Member since 2018 · 1k+ posts · 938 votes
3y
Quote from @Christopher Liu:
Quote from @Simon W.:
Quote from @Christopher Liu:

@Simon W. I would modify it as follows : instead of having the property manager send you the rent minus his expenses he should send it to a bank account opened in the name of the LLC.

What? Why? 
Because the property is now owned by the LLC.
That is correct;
The money should go from the property manager to the LLC. By sending the money to you, you are commingling asset and in case of lawsuit the opposite attorney will tell the judge that your LLC is a sham and an alter ego as you receive the money directly. If you don't respect the separation of your LLC yourself why should the judge do? So all the asset protection purpose of your LLC will be voided (piercing the veil).

Open a bank account for your LLC, update the contract with your property manager to mention your LLC as the client/owner of the property (and not you), make sure that you sign all documents for the LLC with your title for the LLC and not as an individual, update all insurances to put the LLC as primary insured, and possibly you as agent of the LLC as additional insured, do not commingle money, keep good bookkeeping and follow the formalities of the LLC operating agreement (members meeting; state filing; etc...)
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  • Linda WeygantPro Member
    Investor and CPA · Arvada, CO · Member since 2015 · 2k+ posts · 3k+ votes
    3y

    No need to change the arrangement. There's nothing about an LLC that changes the way you conduct business.

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  • Simon W.Business Member
    Real Estate Consultant · Lehigh Valley PA & New York City · Member since 2013 · 1k+ posts · 676 votes
    3y
    Quote from @Chris Tedeschi:

    Sorry, I couldn't think of a better title >_<

    So, here's the question: If you have own a property which you moved into an LLC AND you have a property manager, managing said property, how should payment of his services work?

    So, before our home was in an LLC, all rent went to the property manager, he sent it to us and removed his fee from it and any additional items (lawn care costs, HVAC repairman, etc...)

    Now that it's in an LLC, does the rent he collects need to come to us completely first and we pay him for his services from our bank account?

    To me, its an accounting question and I'm not sure if legally it all needs to come into our account and then be paid back out or not.

    Can someone give me an education on this please.

    Thanks,
    Chris
     

     @Linda Weygant is correct. No need to change to way it is being paid.

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  • Christopher Liu
    Rental Property Investor · Santa Rosa CA · Member since 2014 · 56 posts · 48 votes
    3y

    @Simon W. I would modify it as follows : instead of having the property manager send you the rent minus his expenses he should send it to a bank account opened in the name of the LLC.

    2Reply
  • Linda WeygantPro Member
    Investor and CPA · Arvada, CO · Member since 2015 · 2k+ posts · 3k+ votes
    3y
    Quote from @Christopher Liu:

    @Simon W. I would modify it as follows : instead of having the property manager send you the rent minus his expenses he should send it to a bank account opened in the name of the LLC.


     Why?

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  • Simon W.Business Member
    Real Estate Consultant · Lehigh Valley PA & New York City · Member since 2013 · 1k+ posts · 676 votes
    3y
    Quote from @Christopher Liu:

    @Simon W. I would modify it as follows : instead of having the property manager send you the rent minus his expenses he should send it to a bank account opened in the name of the LLC.

    What? Why? 
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  • Conrad Cortes
    Real Estate Agent · Houston, TX · Member since 2020 · 56 posts · 34 votes
    3y

    @Linda Weygant

    Im just a normal guy when it comes to taxes, so sorry if this is wrong. But.. I heard that you would want to keep things operating totally under the llc including the financials. The reason is because intertwined finances is how lawyers pierce the corporate veil when suing an llc.

    What are your thoughts on this?

    0Reply
  • Bob S.
    Real Estate Consultant · Cleveland · Member since 2020 · 6k+ posts · 3k+ votes
    3y

    Nothing changes, 

    1Reply
  • Steve Vaughan
    Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
    3y


    The more important issue than this accounting is to make sure your title insurance and hazard insurance remain in effect when quitclaiming to a disregarded entity. 

    So the PM pays the owner. The PM 1099s the owner. The owner is now the LLC.

    I don't hold residential property inside LLCs, but if the owner changed it stands to reason to me so should the money flow including probably updating the PM agreement. 

    And for what? Is this just a completely disregarded SMLLC?  Then the whole thing really does nothing but complicate all this.   @Chris Tedeschi

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  • Linda WeygantPro Member
    Investor and CPA · Arvada, CO · Member since 2015 · 2k+ posts · 3k+ votes
    3y
    Quote from @Conrad Cortes:

    @Linda Weygant

    Im just a normal guy when it comes to taxes, so sorry if this is wrong. But.. I heard that you would want to keep things operating totally under the llc including the financials. The reason is because intertwined finances is how lawyers pierce the corporate veil when suing an llc.

    What are your thoughts on this?


    My thoughts are that there are two accountants replying to the OP.  Going off on a tangent because one "developer" threw a turd in the punch bowl is... possibly not a great way to glean info on the internet.  

    Hiring a property manager/agent does not "intertwine" anything.  Piercing the corporate veil has to do with mixing business and personal expenses within the same entity/accounts, with no regard for attempting to keep things separated.

    A property manager is a professional agent who you hire to do a job. One of their jobs is to collect rent on your behalf, pay expenses on your behalf and then send you the balance of your funds. Nothing about that is even close to comingling and/or piercing the corporate veil. There is no difference between hiring a property manager and hiring a plumber. Both are providing a service to you/your LLC.

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  • Christopher Liu
    Rental Property Investor · Santa Rosa CA · Member since 2014 · 56 posts · 48 votes
    3y
    Quote from @Linda Weygant:
    Quote from @Christopher Liu:

    @Simon W. I would modify it as follows : instead of having the property manager send you the rent minus his expenses he should send it to a bank account opened in the name of the LLC.


     Why?


    Because the property is now owned by the LLC.

    0Reply
  • Christopher Liu
    Rental Property Investor · Santa Rosa CA · Member since 2014 · 56 posts · 48 votes
    3y
    Quote from @Simon W.:
    Quote from @Christopher Liu:

    @Simon W. I would modify it as follows : instead of having the property manager send you the rent minus his expenses he should send it to a bank account opened in the name of the LLC.

    What? Why? 
    Because the property is now owned by the LLC.
    1Reply
  • Mike S.
    Investor · Broward County, FL · Member since 2018 · 1k+ posts · 938 votes
    3y
    Quote from @Steve Vaughan:


    The more important issue than this accounting is to make sure your title insurance and hazard insurance remain in effect when quitclaiming to a disregarded entity. 


    Do not use a quit claim deed. Use a warranty deed when transferring to the LLC.

    2Reply
  • Mike S.
    Investor · Broward County, FL · Member since 2018 · 1k+ posts · 938 votes
    3y
    Quote from @Christopher Liu:
    Quote from @Simon W.:
    Quote from @Christopher Liu:

    @Simon W. I would modify it as follows : instead of having the property manager send you the rent minus his expenses he should send it to a bank account opened in the name of the LLC.

    What? Why? 
    Because the property is now owned by the LLC.
    That is correct;
    The money should go from the property manager to the LLC. By sending the money to you, you are commingling asset and in case of lawsuit the opposite attorney will tell the judge that your LLC is a sham and an alter ego as you receive the money directly. If you don't respect the separation of your LLC yourself why should the judge do? So all the asset protection purpose of your LLC will be voided (piercing the veil).

    Open a bank account for your LLC, update the contract with your property manager to mention your LLC as the client/owner of the property (and not you), make sure that you sign all documents for the LLC with your title for the LLC and not as an individual, update all insurances to put the LLC as primary insured, and possibly you as agent of the LLC as additional insured, do not commingle money, keep good bookkeeping and follow the formalities of the LLC operating agreement (members meeting; state filing; etc...)
    3Reply
  • Steve Vaughan
    Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
    3y
    Quote from @Mike S.:
    Quote from @Steve Vaughan:


    The more important issue than this accounting is to make sure your title insurance and hazard insurance remain in effect when quitclaiming to a disregarded entity. 


    Do not use a quit claim deed. Use a warranty deed when transferring to the LLC.

     For sure.  Never would. @Chris Tedeschi is the one that needs to know but obviously doesn't care for whatever reason.  

    1Reply
  • Simon W.Business Member
    Real Estate Consultant · Lehigh Valley PA & New York City · Member since 2013 · 1k+ posts · 676 votes
    3y
    Quote from @Mike S.:
    Quote from @Christopher Liu:
    Quote from @Simon W.:
    Quote from @Christopher Liu:

    @Simon W. I would modify it as follows : instead of having the property manager send you the rent minus his expenses he should send it to a bank account opened in the name of the LLC.

    What? Why? 
    Because the property is now owned by the LLC.
    That is correct;
    The money should go from the property manager to the LLC. By sending the money to you, you are commingling asset and in case of lawsuit the opposite attorney will tell the judge that your LLC is a sham and an alter ego as you receive the money directly. If you don't respect the separation of your LLC yourself why should the judge do? So all the asset protection purpose of your LLC will be voided (piercing the veil).

    Open a bank account for your LLC, update the contract with your property manager to mention your LLC as the client/owner of the property (and not you), make sure that you sign all documents for the LLC with your title for the LLC and not as an individual, update all insurances to put the LLC as primary insured, and possibly you as agent of the LLC as additional insured, do not commingle money, keep good bookkeeping and follow the formalities of the LLC operating agreement (members meeting; state filing; etc...)

    This is utterly ridiculous to even state such a comment. You are throwing in these weird scenarios to scare the OP. Why is everyone assuming that he will be commingling funds if the money was sent to him?

    Yes, he should have a separate bank account for the LLC.

    OP is asking if the paying arrangement stays the same or not. Answer is it stays the same.

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  • Mike S.
    Investor · Broward County, FL · Member since 2018 · 1k+ posts · 938 votes
    3y
    Quote from @Simon W.:

    This is utterly ridiculous to even state such a comment. You are throwing in these weird scenarios to scare the OP. Why is everyone assuming that he will be commingling funds if the money was sent to him?


    How can you justify having money sent to you directly when the property is not owned by you but by the LLC?
    By doing so you are just proving that the LLC and you are the same.

    When you go to the car dealership, does the seller ask you to write a check to his/her name and not the name of the dealership? Treat your LLC with the same respect.

    Even if your LLC is a single member and disregarded for tax purpose, sending money to you is not illegal, but will make voiding your LLC protection very easy. Why going through all the hassle of creating an LLC to protect yourself if you are destroying its company veil?

    The way the property manager manage the fund is the same, the proceeds should just now be sent to the LLC name/bank account instead of the individual. 1099-MISC should also reflect that, and as such all the contracts showing the new ownership of the property.

    0Reply
  • Simon W.Business Member
    Real Estate Consultant · Lehigh Valley PA & New York City · Member since 2013 · 1k+ posts · 676 votes
    3y

    I am not justifying anything. You are throwing unnecessary scares to the OP. Not once did the OP mentioned if it was paying to him personally or LLC. The OP's post is about the paying arrangement if it gets deducted first or vice-versa.

    Because of one developer decides to throw a curve ball, everyone is going off topic.

    It is the same Property Manager so it is safe to say that the PM already knows who he is even if its made to the LLC.

         "By sending the money to you, you are commingling asset"

    Are you stating this as a fact? Because his PM decides to send him a check, he is commingling asset?

    I understand the whole LLC protection situation and I agree with the bank under an LLC, but bringing commingling and judge to the OP's attention is just unnecessary.

    You are free to start a new thread about how sending money to someone's personal name instead of the LLC would be commingling funds. Not sure if you ever heard of endorsing a check to an LLC on the back of the endorsement line.

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  • Linda WeygantPro Member
    Investor and CPA · Arvada, CO · Member since 2015 · 2k+ posts · 3k+ votes
    3y
    Quote from @Christopher Liu:
    Quote from @Linda Weygant:
    Quote from @Christopher Liu:

    @Simon W. I would modify it as follows : instead of having the property manager send you the rent minus his expenses he should send it to a bank account opened in the name of the LLC.


     Why?


    Because the property is now owned by the LLC.


     That's not a reason.  Please - if you're going to participate in the forums, you'll need to explain and justify your reasoning.  Particularly when discussing a topic with people who are very knowledgeable or even experts in the area in which you're trying to advise.

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  • Mike S.
    Investor · Broward County, FL · Member since 2018 · 1k+ posts · 938 votes
    3y
    Quote from @Simon W.:

    I am not justifying anything. You are throwing unnecessary scares to the OP. Not once did the OP mentioned if it was paying to him personally or LLC.


    Maybe I am misinterpreting the OP but when I read:

    Now that it's in an LLC, does the rent he collects need to come to us
    completely first and we pay him for his services from our bank account?

    To me, its an accounting question and I'm not sure if legally it all needs
    to come into our account and then be paid back out or not.

    I understand the last statements as the OP bank account, not the LLC bank account.
    I agree with everyone else that the way the property manager pay the owner after expenses is not changing, I am just pointing out that the change is who the owner is; and now the property manager should not send the money to the OP as an individual but to the LLC instead. And I am explaining that if the property manager continues to send the money to the OP as an individual and not the LLC, that will weaken the OP liability protection. If you believe that it is off topic, sorry to waste your time by reading me, my purpose was to educate the OP not you. If the OP has that simple question regarding the payment, it seems logical that the OP needs also to be aware of that point that is much more important. Again why creating an LLC to start with if it is to weaken its main purpose.
    1Reply
  • Mike S.
    Investor · Broward County, FL · Member since 2018 · 1k+ posts · 938 votes
    3y
    Quote from @Linda Weygant:

     That's not a reason.  Please - if you're going to participate in the forums, you'll need to explain and justify your reasoning.  Particularly when discussing a topic with people who are very knowledgeable or even experts in the area in which you're trying to advise.


    From an accounting point of view, if the LLC is disregarded, it does not change anything as everything is still under the individual taxable party.

    From a legal point of view however, the flow of money is one of the element that is looked at during a veil piercing attempt. The money should flow from the property manager to the property owner. The property owner is now the LLC and as such the money should flow to the LLC. Flowing the money directly from the property manager to the member of the LLC will weaken the liability protection of the LLC.






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  • Linda WeygantPro Member
    Investor and CPA · Arvada, CO · Member since 2015 · 2k+ posts · 3k+ votes
    3y
    Quote from @Mike S.:
    Quote from @Linda Weygant:

     That's not a reason.  Please - if you're going to participate in the forums, you'll need to explain and justify your reasoning.  Particularly when discussing a topic with people who are very knowledgeable or even experts in the area in which you're trying to advise.


    From an accounting point of view, if the LLC is disregarded, it does not change anything as everything is still under the individual taxable party.

    From a legal point of view however, the flow of money is one of the element that is looked at during a veil piercing attempt. The money should flow from the property manager to the property owner. The property owner is now the LLC and as such the money should flow to the LLC. Flowing the money directly from the property manager to the member of the LLC will weaken the liability protection of the LLC.







     You are hanging this ENTIRE tirade on the OPs use of the word "us".  That's pretty pedantic, don't you think?

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  • Mike S.
    Investor · Broward County, FL · Member since 2018 · 1k+ posts · 938 votes
    3y
    Quote from @Linda Weygant:

    No need to change the arrangement. There's nothing about an LLC that changes the way you conduct business.


    That is pretty pedantic too. When using an LLC there are a lot of things that need to change the way you conduct business.

    That is why you want in your team not only accountant but also lawyers, as listening to only one of them will maybe give you exact answer for their field but very bad advice for your whole structure...
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  • Jay ThomasPro Member
    Real Estate Agent · Houston, TX · Member since 2021 · 1k+ posts · 715 votes
    3y

    When it comes to Real Estate, forming an LLC may give you the freedom and flexibility to pursue your business goals. Although there's nothing about an LLC that changes the way Real Estate is conducted, it can provide important legal protection against personal liability and help ensure your assets are protected in case of a lawsuit or other unforeseen circumstances. While setting up an LLC isn't always necessary for Real Estate investments, it's certainly something worth considering if you're looking for additional protection.

    [email protected]832-889-5607
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  • Michael PlaksPro Member
    Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
    3y

    I find this thread amusing. It appears like people have strong disagreements while actually there is none. 

    Two separate issues are being discussed. The first one is the original question asked by @Chris Tedeschi. The PM is sending the investor net proceeds, i.e. gross rents minus expenses. Does it change if the investor operates under an LLC? And the answer is - no, it stays the same. Everyone agrees on this one.

    Another tangent issue that popped up in the process is where this money should be sent to, i.e. which bank account? Should be the property owner's account. Before LLC - a personal account. After LLC - the LLC account. I don't think anybody disagrees with this principle, either.

    Bottom line: the only thing to change in regards to the PM payments is the bank account where net proceeds are sent.

    However, changing ownership to an LLC likely triggers other formalities that are NOT tax-related but are purely legal compliance. You might have to change your lease agreement to a different owner, you might have to change the insurance policies, the utility services and other legal arrangements. I'm saying "might" because it's a legal issue, and I'm not an attorney.

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