Restructuring with 2 series LLCs or what? Need help.

[Robert Haney]

I'm in Houston TX area.  I have 3 real estate businesses I started 3 years ago. 

1)  Sole proprietor Fix and flip business: doing 15+ properties per year all cash with 6 to 9 properties in inventory.  

2) Sole proprietor Rental business: 6 rentals properties with 3 mortgages and 3 free and clear.  

3) Roth IRA LLC to Buy, Fix, Rent, sell after 1 year and repeat: 4 free & clear rental properties.

The businesses grew faster than I expected due to involving a family member to help. So my Sole proprietor start is about to turn into LLCs for asset protection. I also intend to convert my Roth IRA LLC into a series LLC to separate each rental and the cash and the next purchases.

That leaves decisions to be made as to the exact structure of the businesses:  

The Fix and Flip business which is an "operations" company using contractors to rehab houses and then buyers to purchase the houses (i.e. plenty of potential liability)

The rental business which owns houses in my personal name and rents them in my dba. (also potential liability from tenants & their guests)

That's the brief background.  Here are my questions:

1. I'm considering a single member series LLC taxed as an S-corp for the Fix & Flip business. While I'm concerned about having 10 or 20 bank accounts (one for Parent LLC and one for each series), what is a good practical operating and asset protection way to set up this series LLC? (I know there are many possibilities) Would a "management" series be one of the series that managed rental properties in a separate Rental LLC?

2. I'm considering a single member series LLC as a disregarded entity for the Rental business. Should there be a separate LLC to manage the rentals (lease, collect rents, fix and maintain, etc.)? Or would a "management" series be just as good? If so, which LLC would house the rental management series, the Fix and Flip series or the Rental series? Does it matter?

3. After converting the Roth IRA LLC to a Roth IRA series LLC, how would you handle the management of the rentals? One series for the "management" series?

Feel free to offer any guidance you see fit.

[Scott Smith]

Originally posted by @Robert Haney:

I'm in Houston TX area.  I have 3 real estate businesses I started 3 years ago. 

1)  Sole proprietor Fix and flip business: doing 15+ properties per year all cash with 6 to 9 properties in inventory.  

2) Sole proprietor Rental business: 6 rentals properties with 3 mortgages and 3 free and clear.  

3) Roth IRA LLC to Buy, Fix, Rent, sell after 1 year and repeat: 4 free & clear rental properties.

The businesses grew faster than I expected due to involving a family member to help. So my Sole proprietor start is about to turn into LLCs for asset protection. I also intend to convert my Roth IRA LLC into a series LLC to separate each rental and the cash and the next purchases.

That leaves decisions to be made as to the exact structure of the businesses:  

The Fix and Flip business which is an "operations" company using contractors to rehab houses and then buyers to purchase the houses (i.e. plenty of potential liability)

The rental business which owns houses in my personal name and rents them in my dba. (also potential liability from tenants & their guests)

That's the brief background.  Here are my questions:

1. I'm considering a single member series LLC taxed as an S-corp for the Fix & Flip business. While I'm concerned about having 10 or 20 bank accounts (one for Parent LLC and one for each series), what is a good practical operating and asset protection way to set up this series LLC? (I know there are many possibilities) Would a "management" series be one of the series that managed rental properties in a separate Rental LLC?

2. I'm considering a single member series LLC as a disregarded entity for the Rental business. Should there be a separate LLC to manage the rentals (lease, collect rents, fix and maintain, etc.)? Or would a "management" series be just as good? If so, which LLC would house the rental management series, the Fix and Flip series or the Rental series? Does it matter?

3. After converting the Roth IRA LLC to a Roth IRA series LLC, how would you handle the management of the rentals? One series for the "management" series?

Feel free to offer any guidance you see fit.

 I will just share some of the conventional wisdom, it can vary quite a bit depending on the specifics of what you own and how you like to operate.

1. Fix & Flips - much of the time it is best to operate from a Series LLC (or a traditional LLC for smaller operations) for the fix and flips, then use an operations LLC [a traditional LLC] to conduct your activities. There are several options for the banking within this setup: (1) operational LLC can end up being what receives and spends money for the setup per the operating agreements, (2) operation LLC does most activities, but you can also open accounts for each [child] series for specific funds (this can turn into a nightmare, so it isn't recommended,) or (3) the operational LLC conducts activities and then house all individual expenses under the [parent] LLC bank account with correct earmarking (through Quickbooks, etc.) The burden of proof is on you to establish these are operated separately, but you don't necessarily need to keep them all in separate accounts - I have seen many people coming by accidentally using the wrong account for something, too. Option number (1) is preferable in my eyes. If there is an issue with the operations LLC, then you would dissolve it and just form a new one - only the liquid assets would be at risk and no assets.
2. Rental business - once again, this would be best to conduct with a Series LLC which holds each property under separate [child], and then an operational LLC for the activities (rent collection, property management, contractor work, etc.) This offers the same banking options as explained above. The goal is just to separate the high liability activities from your assets as much as possible.
3. You can also just use a traditional LLC as the operating company via property management agreement.

Other things to bring into consideration: anonymity, limiting the exposure of a single (Series) LLC and the potential of offshore trusts. Anonymity can be added to each of these structure through the use of trusts - you may already have this, but you never mentioned it. You would establish agent trusts to house the LLCs and then place the properties into land trusts and have your attorney sign as a "nominee trustee." Once the filing is completed you become the "trustee" per the agreement, but the attorney's name is on public record, protected by attorney client privilege. This is a big lawsuit deterrent as (1) it introduces yet another barrier to entry, and (2) people can't clearly see that you own a lot of assets.

Limiting exposure is just another failsafe that you can introduce when you continue growing, especially when involving the money of partners. Usually I recommend creating a new Series LLC for a client when the assets surpass $5MM in a Series LLC so that they financing doesn't become too burdensome for the Series LLC, as well as in the chance of things going wrong of mistakes being made you have the additional separation to protect yourself. The use of offshore trusts is an additional step some investors take around this same price point, but this is for different reasons.

These are just some considerations. I’ve seen many very complex asset protection strategies, but often times it’s about breaking things down to what is most functional - if your plan is too complex and you start making mistakes, then you aren’t really doing yourself any favors…