LLC vs S-Corp/ Too many Properties Rentals?? CPA - Tax Attorney

[Kristen Bouvier Scoville]

Could use some Tax Attorney or CPA advice! Here's what I have.. My husband and I live in a small Western New York College Town. We currently own over 20 properties primarily Student Rentals; 1- (6 unit 1bd), 1-(3 bldg- 20 unit 4bd-2bth) 4 commercial bldg's w/ 4 upstairs apart.s,  3 Duplexes, a Double Cottage on a Lake, 1 Auto Mechanic Garage, and the remaining properties are 4 bd 2 bth single family homes.  

I believe our business is getting too big for us and our little town. No offense to the amazing professionals we have worked with over the years but I have been researching a lot and feel as though we are getting mixed information from attorney's, CPA's & Insurance Agents. We seem to be over paying for various types of liability and umbrella insurances which I believe some seemed to be covered under the LLC's protection and I definitely think we have too many LLC's and should be creating possibly an S-Corp or another type of Corporation that will better fit this large of a property portfolio.

Currently we have over 15 Bank accounts and 10 LLC's and our attorney is telling us we need to create more. It is becoming a management and accounting nightmare!

I feel as though we would have much more productivity without having to micromanage so many LLC's and Bank accounts. We both want equal share in the company and there are no other owners. We use Subcontractors mostly have only a few year round employees. So the structure is pretty simple. He does all the negotiating, contracting, building, repairs, maintenance etc.. I do all the buying selling, tenant, billing.. etc.. we hire out for various jobs..

Thanks so much!! Any advice would be so appreciated!

[Scott Smith]

When meeting with clients the first order is to discuss (A) their personal assets, (B) break down their current investments portfolio and other business ventures before discussing any (C) future goals. Each of these variables will dramatically change the advice for the individual asking this question. I often break it down into the "five pillars" of protecting your assets.

1st pillar is avoiding unnecessary and risky activities (don't drink and drive, insurance generally won’t cover your poor decisions) and take good care of your investments - these simple steps will help you prevent lawsuits before they even occur.

2nd pillar is a good insurance policy as that cover the majority of your exposure. However, insurance is limited because it only protects you from one type of liability: accidents/negligence. Insurance doesn’t protect you from any part of the sale or acquisition of a property (e.x. Somebody wanting to sue for you backing out of a bad deal or accusing you of selling them a property with defects like unknown termite damage). Insurance also doesn’t protect you from misunderstandings, especially those made in writing and email. What happens in these misunderstandings is that something goes wrong either in the sale or after, and then they sue you for some statement you made that they “misunderstood”. That lawsuit is a claim for fraud, and that’s what fraud typically is...a misunderstanding and someone being “injured” and wanting to hold the other responsible for it. Insurance never protects you from these kinds of claims and they happen all the time.

3rd pillar applies after you have good insurance You need to protect yourself from what insurance doesn’t cover by compartmentalizing your assets. Compartmentalization means that if something happens to one property they can't touch you or the other properties. You should use either LLC's (the old and expensive way) or a Series LLC (the new and more cost/time effective way). No matter where you live or where you own assets, I personally recommend 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 for FREE- check out this article to learn more.

4th pillar is somewhat similar - you want to separate your operations from your assets. One company owns everything and does nothing (this is your SLLC a/k/a "asset holding company") and a completely separate company handles all of your operations (this is a traditional LLC a/k/a "operating company") For the operating company which serves as your face to the world and through which you do all your business, you establish a Traditional LLC to carry out the operations of your investments. The operating company takes on all of the liability that would otherwise blow back on you including: paying property management, paying contractors, collecting rent, marketing, etc.

5th pillar is owning everything anonymously. If people don't know what you own, then they are less likely to sue. People don't sue people that qualify for food stamps. This anonymity can be accomplished for free by using Trusts to own your companies as well as the assets. Trusts create this anonymity by removing your name from public record. Even if they can see you used to own a property, when properly transferred it will look like it was sold to investors. If they somehow guess you are the owner still, it doesn't matter because you are not the owner. The trust and the LLC are the owner of the asset/real estate, so even in the scenario that they guess, they guess wrong.

The conventional wisdom often carries you through the initial pillars, but as you grow and want to introduce more structure and the ability to scale it can get tricky. There are still more pillars to asset protection that can be taken, but in your situation the Series LLC would help you cut down significantly on the number of bank accounts. From there it can also be set up to tie in tax advantaged entities and estate planning. An experienced attorney could tie these structures together to streamline corporate compliance and integrate your operations, while giving you options to include additional layers of protection as you grow more.

This isn't legal advice, just my opinion as a real estate investor.