LLC Structure to simplify Taxes and Operations
Investor · Ogden, UT · Member since 2015 · 12 posts · 2 votes
LLC Structure to simplify Taxes and Operations
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Devon, PA · Member since 2016 · 93 posts · 23 votes
9yFirst form a Holding LLC as a partnership in Wyoming/Nevada. This holding LLC will file annual taxes and file K1's, get IRS EIN with partnership structure and open bank account.
Change the other local State LLC's structure where the property Title is held into an IRS Disregarded Single Member LLC which is 100% owned by Holding LLC. Get IRS EIN for local state LLC's as Disregarded entity and open separate bank accounts.
When you deposit and withdraw money from your personal bank account, only do it from/to the Holding LLC bank account. You can move money freely between Holding LLC bank account and local state LLC accounts. You can get one Credit card for the Holding LLC bank account for expenses.
With this setup, YOU own the Holding LLC and all other LLC's are owned by the Holding LLC. The Federal Tax returns are only filed for the Holding LLC.
Key terms -- Holding LLC is setup as Partnership with IRS and local state LLC's are setup as Disregarded single member LLC's with IRS when getting an EIN number. Your LLC Operating agreement should also have this ownership structure.
Note: This is not an advice, please do your own due-diligence.
27 Replies
- Investor · Boston, MA · Member since 2015 · 398 posts · 147 votes9y
I had put all properties into one LLC, with umbrella insurance. If I were you I would just quitclaim them into the one LLC and simplify!
- Investor · Ogden, UT · Member since 2015 · 12 posts · 2 votes9y
Wont I loose asset protection by there being access to all properties if something were to go awry? Does the umbrella policy provide protection or just a means to pay out to someone if they sue?
- Certified Public Accountant (CPA) / Investor · Homer, NY · Member since 2016 · 68 posts · 52 votes9y
I'm not an insurance expert but my understanding is the umbrella will protect you from liability above what is on your landlord homeowners policy. It is relatively cheap and considered a good product.
I did want to comment though about your use of one bank account. You run the risk of losing all the protection the LLC provides when you do this. Just like using a LLC account to pay personal or vice versa. If you want to run separate LLCs then get separate accounts.
Do you have partners in all your LLCs? If not then you can definitely simplify your tax return.
- Investor · Ogden, UT · Member since 2015 · 12 posts · 2 votes9y
@Dave Holland
I hear you about the insurance its just odd because there is so much discussion about how the LLC is the way to go.
Yeah I definitely know I run the risk because my assets aren't truly separate. Definitely want to get that fixed. What I was hoping I could maybe do is have one of the LLC function as the "Operations" LLC and it would own the bank account and then all transactions could use the single bank account? Not sure if that would work. Maybe have one LLC (parent) own the other LLCs (child)?
My only partner is my wife. The potential extra asset protection might not truly be worth and headache of running multiple LLCs and the LLCs not truly existing as separate at this point.
- Investor · Ogden, UT · Member since 2015 · 12 posts · 2 votes9y
I hear you about the insurance its just odd because there is so much discussion about how the LLC is the way to go.
Yeah I definitely know I run the risk because my assets aren't truly separate. Definitely want to get that fixed. What I was hoping I could maybe do is have one of the LLC function as the "Operations" LLC and it would own the bank account and then all transactions could use the single bank account? Not sure if that would work. Maybe have one LLC (parent) own the other LLCs (child)?
My only partner is my wife. The potential extra asset protection might not truly be worth and headache of running multiple LLCs and the LLCs not truly existing as separate at this point.
- Certified Public Accountant (CPA) / Investor · Homer, NY · Member since 2016 · 68 posts · 52 votes9y
You'd have to speak with an attorney to get advice on the structure you describe.
I'm not against LLCs, in fact I am forming one for my rentals, but it's to protect my personal assets from my business. Don't think I'll want to protect my business from other business assets since I buy 2-4 unit properties right now. I'd rather spend the money used to form and administer more LLCs on an umbrella policy that will cover all of my rentals. But that's just the way I feel most comfortable which might not necessarily work for you.
- Investor · Ogden, UT · Member since 2015 · 12 posts · 2 votes9y
Your post makes a ton of sense. Depending on how much each property is worth with respect to each other as well as how much your properties are worth vs how much you are worth will determine your structure.
Assuming all 4 of the properties were worth $1M each then maybe keeping them in a seperate LLC each makes sense. . However, mine are not worth that much so providing so much asset protection is not worth it.
- Investor · Panama City, FL · Member since 2015 · 378 posts · 183 votes9y
If you have loans on the properties 4 separate LLCs is overkill, remember If your LLC is sued they can only go after any equity in the LLC, and this is the "fire" sale value of the property minus the mortgage, because the mortgage has first lien. Don't forget they have to sue you win, get a judgment then forclose, almost all these cases are done on contingency so no attorney will even look at it unless you have allot of equity in the homes. This is from a guy who loves him some LLCs because I had one of my LLCs sued when one tenants dog bit the other tenant. Case was dropped once the attorney realized I didn't have Liability Insurance, and loans on the property. Even if you have 100k in equity An attorney is not going to risk tens of thousands in legal work to for a remote chance to get 33k contingency.
Hope this helps good luck!
- Investor · Ogden, UT · Member since 2015 · 12 posts · 2 votes9y
@Cameron
To make sure I understand you correctly. Liability Insurnace (Umbrella policy?), in a way, might encourage lawsuit since the lawyer knows they will get payout? Makes sense that mortgages helps limit liability as well.
So moving forward, sounds like I need to just put all 4 properties under one LLC and have insurance that covers a property in an LLC name? And yes all my properties are 20% down convention loans that I have only recently purchased, LTV 80%.
- Investor · Panama City, FL · Member since 2015 · 378 posts · 183 votes9y
OK if you want to start a huge battle on Biggerpockets start a post on this subject, I have posted on this before, many people disagree with me but this is my real life story.
So during the financial crash I'm just casually talking to a big time local personal injury attorney who goes to my church, I say well at least this down turn doesn't hurt you, he says actually it does businesses are hurting so bad they are dropping their insurance, and its almost never a feasible to take legal action if the they don't have insurance. So I talked with an Asset protection attorney and he concurred, also there is a great book "So Sue Me" that also suggest, this tactic. Now one thing to remember Liability Insurance will also pay legal expenses if they do move forward, but in many cases you can represent yourself. In my case I actually new the attorney who sued me and I called him explained the LLC had no insurance and only small amount of equity. He either didn't believe I did not have Liability Insurance because most policies automatically include it unless you purposely exclude it, or maybe he thought he might scare me and shake me down for a few dollars. So he did sue my LLC, and I did have to "answer" the complaint then he requested copies of all insurance policies on the property during discovery, once he realized I didn't have any liability insurance he dropped the suit.
Any way just what ha worked for me, hope this helps good luck
- Devon, PA · Member since 2016 · 93 posts · 23 votes9y
First form a Holding LLC as a partnership in Wyoming/Nevada. This holding LLC will file annual taxes and file K1's, get IRS EIN with partnership structure and open bank account.
Change the other local State LLC's structure where the property Title is held into an IRS Disregarded Single Member LLC which is 100% owned by Holding LLC. Get IRS EIN for local state LLC's as Disregarded entity and open separate bank accounts.
When you deposit and withdraw money from your personal bank account, only do it from/to the Holding LLC bank account. You can move money freely between Holding LLC bank account and local state LLC accounts. You can get one Credit card for the Holding LLC bank account for expenses.
With this setup, YOU own the Holding LLC and all other LLC's are owned by the Holding LLC. The Federal Tax returns are only filed for the Holding LLC.
Key terms -- Holding LLC is setup as Partnership with IRS and local state LLC's are setup as Disregarded single member LLC's with IRS when getting an EIN number. Your LLC Operating agreement should also have this ownership structure.
Note: This is not an advice, please do your own due-diligence.
- Carson City, NV · Member since 2017 · 8 posts · 0 votes9y
Nevada has a "Series LLC" that is helpful. I was told by a CPA that a Series can be used as an umbrella for bookkeeping purposes. They are very easy to set up. First year is $425. 2nd year and beyond are $350.
- Investor · Ogden, UT · Member since 2015 · 12 posts · 2 votes9y
Most LLCs seem to require an address in the state to open, is it possible to open a Nevada (heard Wyoming was good too) LLC without having property or living there?
- Carson City, NV · Member since 2017 · 8 posts · 0 votes9y
Yes Garrett you can. However, the question is, why would you want to do that? The goal is to create Nexxus, to point everything to Nevada/Wyoming.
- Tax Strategist| National Tax Educator| Accepting New Clients · Member since 2014 · 3k+ posts · 4k+ votes9y
Be careful with Series LLC's....They can only be formed through a handful of states and several states (Including California) have ruled that they are still separate entities and need to each file separately any way.
- Investor · Thermopolis, WY · Member since 2012 · 4k+ posts · 4k+ votes9y
@Garrett Canter, a corporate entity is like a separate person. If you form a corporation or an LLC you have created a fictitious person who can own property. That person will act according to rules (operating agreement) you set up. If the LLC owns property and say the tenants dog bites the other tenant, they can sue the LLC for not providing a safe place to rent. However they can also sue the property manager for negligence. If you self manage then they would sue you too. Now your personal assets are at risk. If you have a separate property manager then you are safe. If they cannot pierce the corporate veil then only the property in the LLC is at risk. If you have 4 properties in the LLC all 4 properties can be liable for any unsatisfied judgements that the plaintiff may get. One of the biggest advantages of an LLC over a corporation is that you can take shares of most corporations from a person who owes you money, but they can only get a charging order from an LLC, they cannot take the LLC ownership away from you if your operating agreement is done correctly.
There are many ways to pierce the corporate veil, the biggest is failing to maintain a separate entity and commingling. The next biggest is probably undercapitalization. That is where you intentionally keep the assets of the corporation low. So if you have 80% equity and take a new mortgage out to drop down to 20% equity again you will have to disclose where the 60% equity went that you took out. If you paid it to yourself you may be sued for undercapitalization. It is not as easy as it looks. For example I have about 35 doors spread out over 2 companies. If I created a separate company for each house the book work would be too much for me to handle. Imagine having 20 separate annual filings, 20 tax returns, 20 bank accounts, 20 sets of books, etc.
You do need to maintain separate bank accounts for each entity, and observe all corporate formalities. Failing to do so will make your LLCs useless for liability protection.
- Investor · Ogden, UT · Member since 2015 · 12 posts · 2 votes9y
@Jerry W. You make a lot of great points but seems to argue for and against each point. I am probably miss understanding you.
I want to maximize liability protection while reducing all the multiple filings. Based on the discussions so far and the relatively small portfolio (5 properties). It sounds like the best option is to have one LLC holding all 5 entities. Each entity currently has a LTV ratio 80%, or more, providing additional protection by being poor targets for legal action. The insurance will be LLC owned rental property insurance. Although It sounds like this scenario does make me a little vulnerable, since there will be access to several of my properties, it reduces the paperwork and still separates the business from my personal investments. Once each of the properties gets larger, 1031 exchange and flip up to multi-family, then the value of each property would make it worthwhile to get an umbrella policy and/or separate LLCs for each property.
@Polly Stankuviene , To make sure I understand you, you're saying that the best way to create a lead to Nevada/Wyoming is to have a property there that is the parent LLC?
@Natalie Kolodij , It sounds like Series LLCs are great ideas and hopefully the way things go but just not enough momentum has caught on to make them viable options. I like @Saran Mandhadapu idea but sounds like it still would create multiple 1065/K1s during tax time.
- Investor · Thermopolis, WY · Member since 2012 · 4k+ posts · 4k+ votes9y
@Garrett Canter, or and against having a lot of LLCs is that there are both good and bad points for doing so. The biggest factor in my mind is being able to profit from owning rentals with the least headache. Having an LLC for each property would be too much of a headache for me, and would greatly lower my profit. I would rather pay an extra $2K or $3K for a very hefty umbrella policy than do the paperwork of filing 15 or 20 LLCs. Good management and good insurance are your best protection. Now if each of these properties are over $1 million in value it may be worth it. My properties run between $50K and $100K so having 10 or 15 in the same company is not as big of a deal. Do not let fear of an uncertain event choke out your business. Be careful, use good business practices, and keep going forward. Good luck.
- Insurance Agent · Member since 2015 · 191 posts · 124 votes9y
@Garrett Canter I am not going to touch the LLC vs no LLC debate as their are legitimate arguements both ways depending on your situation and ownership structure.
That being said I strongly believe it is prudent to maintain liability insurance regardless of ownership structure. In the event of a frivolous lawsuit by a personal injury lawyer your insurance will provide you with a competent lawyer eliminating the time you would have to commit defending yourself and pay for those legal fees. These types of claims often result in the insurance company settling the suit for a five figure sum which is also covered by the insurance policy. @Cameron Skinner is correct that lawyers who make a living filing frivolous suits in hopes of a quick payout often drop these suits if there is no path to easy quick money. However, since the insurance company is paying all of the costs anyway this settlement does not effect your assets in anyway.
The main purpose of liability insurance in my opinion is to protect against unforeseeable honest mistakes that result in a legitimate large claim. Even the most diligent and well intentioned landlords can make an honest mistakes. For example, you have a snow removal company remove ice and snow from your properties parking lot at 7 am the day after the storm but if someone slips and breaks their neck at 6 am they would have a legitimate claim. Monetary rewards can assign current and future personal income to pay for this damage. It is these types of claims for which insurance is meant and in my opinion the few hundred a year in insurance is well worth that protection. Additionally, many insurance companies prefer to write both property and liability in a package policy and offer discounts that can make up a significant portion of the liability premium. Industry standard is for liability limits to be $1,000,000 per occurrence and $2,000,000 per policy year. If you want additional limits you can purchase an umbrella policy. We offer an umbrella quote to our clients each year and allow them to make a business decision whether or not to purchase this coverage
- Carson City, NV · Member since 2017 · 8 posts · 0 votes9y
@Garrett Canter I didn't answer your question completely. I might have confused you. Sorry.
An LLC can own property in any state. It does not have to own property in the state it lives in (domicile) You can have a Nevada or Wyoming LLC and the legal address of that LLC is your Registered Agent's address in Nevada or Wyoming.That LLC can then go out and purchase a piece of property in any state. It does not have to purchase a piece of property in Nevada or Wyoming.
The reason people choose Nevada or Wyoming is for the legal protection those states provide, which their home state is not providing for them.
Regarding a Series LLC Nevada has Series, Wyoming does not. Before you ever consider a Series LLC you have to talk to your CPA because it may be more advantageous to you to have an LLC for each property instead of a Series. Only your CPA can answer that.
- Investor · Ogden, UT · Member since 2015 · 12 posts · 2 votes9y
@Polly Stankuviene Who are the best registered agents in a state you don't operate in?
@Account Closed Thanks for the input. As I understand it you mentioned 2 types of insurance. Liability insurance and umbrella policy insurance. As of right now my properties have rental property insurance that is specified to cover an LLC own property. The liability portion of that insurance is $300K. Sounds like you recommend $1M? Also, does an umbrella policy cover multiple units or just one requiring multiple policies?
- Insurance Agent · Member since 2015 · 191 posts · 124 votes9y
@Garrett Canter The liability portion of your rental property insurance is what I was calling liability insurance. The cost of increasing liability limits from $300k to $1mm is generally around $100 a year which I think is worth the extra protection. An umbrella policy can cover multiple properties and it is not uncommon for one umbrella to cover 50+ different properties if needed. Umbrella limits can range from $1 to $10 million depending on the size of your operation and can also provide additional coverage over commercial auto if applicable. This is a real estate umbrella that I have had luck with
- Carson City, NV · Member since 2017 · 8 posts · 0 votes9y
Garrett, I have no idea. My suggestion would be to shop around. Prices and service vary greatly.
- Investor · Ogden, UT · Member since 2015 · 12 posts · 2 votes9y
@Account Closed, Thanks for the recommendation. Ill check it out. Any specific addage about what an umbrella policy provides over just increasing the liability insurance on each property?
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