Relationship between a Holding Company LLC and an Operating LLC

[Jeff D.]

Hello fellow BP readers,

I'm currently looking to set up my first LLC's to begin commercial multifamily investing. I've been doing my homework and i've come to the conclusion that it's in my best interest to establish multiple LLC's for asset protection purposes. I've come to understand that I should establish an LLC for purchasing the property, operating it, and for all business dealings and another separate LLC to simply hold the asset. Any LLC I set up will have a single owner LLC structure.

Can someone expand on the relationship between these entities for me? How do I draw money from the property and distribute to myself? If i establish an LLC for each property, doesn't using a holding company for the properties defeat the purpose of separating them, if they end up just getting held under one entity in the end? I plan to consult an attorney to answer my questions, but in the meantime I'd like to walk into that meeting down the road with a clearer understanding of how this strategy works.

Thanks for your help.

[Jessica Zolotorofe]

Hi Jeff! So as far as the ownership of the properties in an LLC name and how you get your money, in order to keep your asset protection, you would want to write all checks for business related expenses from the business account, and never your own funds. The operating agreement for the LLC will dictate how often you can take "distributions", which means that the money goes from the business account to the members.

The holding company is the same as the purchasing company. You should have 1 LLC otherwise you would have to transfer title which will mess with financing, and just confuse things unnecessarily. I think what you mean is managing the property, not the business. So in other words, if Manager, LLC acted as a property manager and didn't fix a railing properly and someone fell, technically they couldn't go after Owner, LLC and take the property. But cost and complexity-wise, one LLC for each property should really suffice to keep things separate and to give you protection. Especially if you start adding partners, having too many LLCs gets messy both administratively, and for tax purposes. It's really not necessary to have more than one for one property.

What you may have read with regard to "holding" versus "buying" is for the situation where people use the same entity for their fix and flips because you own them for a much shorter period of time, so instead of dissolving an entity every 6 months when you sell a flip, you use the same entity to buy the next flip. It exposes you to maybe slightly more liability, but not enough to bear the cost and complication of new LLCs and cancelling old ones every few months. So if you are only flipping 1 or 2 at a time, that could be a good option. If your plan is to buy, hold and lease, then you would want the individual entities for each property probably because being sued by a tenant, or their guests, or a contractor, etc. is always an ongoing possibility. 

Hope that helps! Feel free to email me if you'd like to discuss further or if you have any additional questions.