Should you combine properties in a single LLC or separate?

Question

I currently have a single member LLC with a commercial property under long term lease. I am on the verge of purchasing my first vacation rental that I had planned on putting in the same LLC. However, my accountant suggests having either a separate LLC for all residential property or a new LLC for each individual property. He concern is to limit crossovers access to other property should a law suit occur. Thoughts?

Eamonn McElroy · Answer

@Jeff Leffew

"However, my accountant suggests having either a separate LLC for all residential property or a new LLC for each individual property. He concern is to limit crossovers access to other property should a law suit occur. Thoughts?"

I'm thinking your accountant isn't qualified to be giving you legal advice...

Scott Smith · Answer

Hey Jeff, just wanted to throw my two cents in on this.

I usually try break things down before making decisions, so I would ask (1) what their personal exposure/assets include, (2) any investments they have [your commercial property, in this case] and (3) what your future plans are. Each of those can dramatically change how I answer the question above. With that being said, I often break it down into the "four pillars" of protecting your assets. The first pillar is a good insurance policy as that cover the majority of your exposure. However, it only protects you from one type of liability: accidents.

After that you want to compartmentalize your assets, which is often accomplished through the use of LLCs or corporations. I personally find the Series LLC to be a great tool for the individual investor who is planning to expand their operation, as it allows for you to scale infinitely - check out this article to learn more. The third pillar is somewhat similar - you want to separate your operations from your assets. That means you establish a Traditional LLC to carry out the operations of your investments, in order to separate the liability from your assets, including: paying property management, paying contractors, collecting rent, marketing, etc. Finally, with the use of Trusts while establishing these structures you can add a level of anonymity by removing your name from public record.

The problem you face with having two separate asset classes [residential and commercial] being housed in the same LLC, outside of increases the potential payout on a legal case, is that you are including two very different types of liability. Your CPA brings up a good suggestion. Opening a separate LLC will reduce the "type" of liability that is inherent with the types of investing you are doing, and obviously reduces that liability because the investments are separated.

It would be a good idea to find an attorney, preferably one with real estate investing experience,  and have the attorney look at your situation. If you intend to continue growing, I would lean toward the Series LLC. If not, I would lean toward setting up another Traditional LLC.

This isn't legal advice and does not create an attorney/client relationship. This is simply my experience as a real estate investor.

Michael Plaks · Answer

@Jeff Leffew

Your question is a legal question, and I agree with @Eamonn McElroy (note this, Eamonn!, haha) - only attorneys should be answering this question. Not your CPA, not me, and not Eamonn.

Now, the bad news is that attorneys totally disagree on this question. I recommend you browse this forum for couple hours, and you will find multiple threads where attorneys debated this topic to death, disagreeing strongly, and sometimes even getting personal with each other. Good luck.

Or just find one good local attorney and trust his/her opinion without second-guessing. The attorney must be licensed in your state, as legal liability is a state issue, and the laws differ from state to state.

There also could be a tax reason to separate these properties: your commercial property is probably a typical rental, while your vacation property might be treated as a hotel-type operation, reported in a different place of your tax return and under different tax rules. Have your CPA explain this to you.

Jeff L. · Answer

...for me being new to BP and this being my first posted question, I must say you folks are amazing and generous with your time. Thank you to all! I will go re-read each of your posts and learn all that I can before I proceed. Some of the suggestions mentioned (i.e. personal umbrella policy) I already have but I never thought of getting one for commercial use. As mentioned, the single member LLC is a passthrough so that eliminates the tax filing costs. LLC cost under $150 to establish here in Indiana so its not much work since I only intend to have 3-5 properties. Again, thank you for taking the time to share your wisdom and helping a "newbie" getting real estate smart!!

Kevin Hart · Answer

whatever you decide, talk to your insurance agent about getting a commercial liability umbrella if you don't have one already. Any real estate investor should have one. You can get a personal liability umbrella as well. at a minimum, it gives you an additional 1 million of liability coverage for your business or personally (coverage can be much higher as well depending on the amount of assets you have to protect). one bad lawsuit can take you down either way, just make sure you have the liability protection to cover it.

David Miller · Answer

Attorneys do disagree on the value of single purpose entities for each asset, but the SPE structure is often required by lenders, which may not be applicable in your case, because it restricts the business activities of  the owning entity and can insulate the collateral from claims from other creditors.  For those acquiring deals with passive investors (like the many syndicators on BP), the investors have the same motivations as lenders.  Plus, syndications often involve different combinations of investors that mandates separate entities.  in the case of your single member LLC, it is your call as to risk management.  Do you want to want to mitigate risk with separate SPEs or utilize some general liability insurance for one entity with multiple assets?

In your case, I would still prefer separate LLCs because (1) insurance policies have lots of exclusions and exceptions and getting paid is not always easy or expedient and (2) I see little value in giving a potential creditor the ability to pursue multiple assets as collateral when a separate single member LLC can be established and maintained with relative ease and (3) single member LLCs are disregarded entities for tax purposes, so the tax consequences of having multiple single member entities is not burdensome.  Others will have what they consider good reasons for having one LLC.

This is not legal advice - talk to your attorney and then make the decision.

Jason Merchey · Answer

Separate. LLCs in my state only cost $120 and take 15 minutes to do.

Matthew Creel · Answer

Jeff,

A number of the clients we service hold commercial real estate with long term lease tenants along with personal vacation property and other rental property in the same LLC.  It is my understanding that your liability exposure associated with the LLC entity choice is limited to your capital investment.  Also, at first glance it would seem that your administrative and tax compliance burden could get quite large depending on how many properties you plan to own if each is housed in its own LLC.

Should you combine properties in a single LLC or separate?

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