Holding Company LLC -- is this overkill?

Question

My lawyer has mentioned a setup where a holding company LLC leases the property to a management company LLC. There would probably need to be multiple holding companies--propably one per property, but only one management LLC. This would make it a lot harder for someone to seize the house in the LLC if they obtained a judgement and the judgement went over the insurance limits (or insurance denied the claim).

This setup sounds pretty solid, but the initial setup cost would be about $2000, and then of course there are the annual fees for the LLCs, and the registered agents, if necessary. I believe that my lawyer is very competent, but of course all lawyers want to make money so I thought it best to run this by other people first.

I've seen a couple other people mention holding companies on here before, but I wonder if this kind of setup is only for someone who owns A LOT of properties and is more of a lawsuit target? The sense I've gotten here and elsewhere is that investors just set up a run of the mill LLC rather than something like this. I'm wondering if I'd just be wasting money with this setup. One big advantage I can see is that all the bookkeeping could be done through the management LLC (rather than through each separate LLC if it were set up the usual way), making things less complicated. Thanks!

Edit: Josh, I think I put this in the wrong category--could you please move to Goals, Business Entities? Thanks!

Account Closed · Answer

Unless you can buy it directly into the LLC or Corp, it's hard to get the transfer.
And when you do buy directly into an LLC, in most states, if you have to evict, you will be required to have a lawyer represent the LLC.
Some states require a business license of some kind on each property you own if you live out of state.
I run under an LLC for groups of properties in the same area and an LLC for each apartment. All the LLC's are tied to our Living Trust.
And many of them are in title holding trusts, which ties back to the Living Trust.
This way, if I or my wife dies, we don't have to play/pay the probate in other states.
Just food for thought.

Mitch Kronowit · Answer

This has been discussed several times in this forum and I have NEVER had anybody substantiate these claims. "Piercing the veil" of an entity is serious business and not one taken lightly by the courts. Of course, the manner if which you operate and maintain your entity plays a large role in how much protection it affords.

Watson Smith · Answer

I incorporated mine.  You need an umbrella policy.  Mine is up to 2 million and cost like $250 a year I think.  A lot of people set up LLC's or Inc.'s per property.  I want to say it cost 100 bucks to set up the Inc. and 50 a year to maintain it.  Not to expensive I guess.  You don't need an attorney to set up either for you.

Kyle K. · Answer

The main draw for LLCs should be asset protection. I'm not sure I see how having a separate property management LLC benefits you other than making accounting/paperwork easier. That being said, I'm not a lawyer. Perhaps having a separate PM LLC allows the legal separation necessary to afford you maximum asset protection. (I don't personally manage my properties so I don't have any experience with what you're proposing).

I will tell you one thing: before you pull the trigger, you should ensure that your insurance company will list you, the PM company and the holding-LLC as insured under your policy.

Frank Maturo · Answer

NO....always set up an LLC even for one NOO property.  This is my opinion but its safest.  If you plan you can get the LLC finacing from the get go as well.

Bony Mathew · Answer

So would you say don't get too caught up on having a holding corporation/llc ?

I was thinking have a holding LLC/Corp for management purposes; then have another LLC for my properties (that i'm willing to place in the same LLC). Is that still an overkill ?

Shawn Dandridge · Answer

Setting up multiple LLC's is just a ploy by lawyers to suck every dollar they possibly can from you. What most failt to tell you is that if you don't live in the state you must get a registered agent, which is rougly a $100 a year for a decent one. Next, in states like Nevada and Wyoming, you have to pay $150 per year to file a list of officers. Also new in Nevada this year, home based businesses are no longer exempt from buying a business license. This will run you another $350 per year. So setting up an LLC for each individual property could run you on average of 500k per year. Not to mention the accountant you have to pay to prepare tax returns for each of these LLC's. Note, you must also maintain a seperate bank account for each LLC. The list just gets longer and longer so you get the idea. You' be better offer with a 5-10m unbrella policy.

Daniel Fisher · Answer

One drawback with multiple LLCs for me is the additional books and added accounting costs. When I buy more properties they will go into my existing entities.
Daniel

Mark Forest · Answer

I have heard from many sources that a lawyer can simply "pierce the veil" and sue you owners as individuals anyway.  You are the managers of the LLC after all.  With that in mind I just do not see the advantage of the LLC.

Steve K · Answer

Pretty common strategy and one I employ in other non real estate related businesses.  Paying an attorney for your incorporation is almost comically expensive.  They simply have their legal assistant handle it online and charge you a significant markup.

Insurance agents will write that kind of policy, but it's more expensive and a little harder to find.  For piece of mind just piggyback a good umbrella policy if you don't want to go through the incorporation process.

Holding Company LLC -- is this overkill?

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