Creating a LLC just for renting and managing my own property.
Los Angeles, CA · Member since 2016 · 565 posts · 391 votes
I have decided so far not to create a LLC for each property, instead using a good insurance. Also because getting loans is complicated in LLC and there are fees for each LLC (just $800 per year franchise tax in California to name one), etc.
But in the interactions with the tenants, for anonymity and some more protection without the above inconveniences, I thought one should be able to create one single LLC for all properties who is tenant facing, managing the properties. My own property management company without the license.
Can I appoint, or give power of attorney to my LLC to represent me vis-a-vis my tenants, lease, collect rent, etc...?
Is there any other legal entity like a DBA which can be used for that purpose?
@Kevin Lefeuvre - Having a separate entity act as your property manager is a very good idea, and it's how all the big boys do it. A properly worded contract can shift all liability to that company in the event of a lawsuit. And do you know whats good about that? That company doesn't own any assets and it's only income is 10% of it's managed portfolios gross rents. There would be nothing for anyone to take.
There is this concept of piercing the corporate veil, and I seen it done with lethal effect.
If the intention is to shift legal liability, the problem is there is a LLC management company, and there is someone in the management company working as the property manager, who may be the principal of the management company. Now, if you hired an outside management company, paid the monthly fees, the PM would have his own E&O insurance. You'll be off the hook.
I bought a business from a couple who operated via an S Corp. They were assured the S Corp would shield them. Then came a $3 million lawsuit, they only had $1 million liability coverage, and the bad news was, the S Corp and they were sued personally. They tried to get the personal part dismissed, it was turned down, and proceeded to trial that way, with them personally and the S Corp.
I followed the case, as my employees were called in for depositions, and they ask about how active the owner is, and was told he was there every day running the business. Fortunately, they moved to FL, and put most of the proceeds into their home there, and due to FL homestead laws, can't be touched, so the plaintiffs settled for the $1 million.
Spoke to lawyers, he actually had a manager on the payroll, had he stayed home and slept, things would be different. The corporate shield didn't protect them, FL homestead laws did.
I think you would have management and legal issues if you take this approach. You'll run into landlord tenant laws in most jurisdictions. I self manage and have set up management company for tax and accounting reasons.
In NYC, for instance, for triplexes or larger, you have to register a 24 hour name and phone number to call for emergencies, and hiding behind anonymous setups will not work. Not only that, you have to display a sign somewhere visible where everyone can see it. The way I remember it, it's a city number, people call, then the city try to contact the person listed, and take further action if they can't hold of responsible owners or PM's.
Examples abound in the need for this. Often there are gas leaks, busted pipes, where the need to get to a responsible person is essential. Other examples are zombie homes, where owners disappear, and banks keep their distance, local authorities spent millions on issues that rightfully should belong to the owner and banks, and many hiding behind LLC's. In recent years, NY developed a state registry, where such properties are listed, with names of persons responsible listed. This way, when something happens, you don't have everyone shrugging their shoulders, pointing to an LLC, and the municipality is stuck with the bills.
@Kevin Lefeuvre - Having a separate entity act as your property manager is a very good idea, and it's how all the big boys do it. A properly worded contract can shift all liability to that company in the event of a lawsuit. And do you know whats good about that? That company doesn't own any assets and it's only income is 10% of it's managed portfolios gross rents. There would be nothing for anyone to take.
@Kevin Lefeuvre - Having a separate entity act as your property manager is a very good idea, and it's how all the big boys do it. A properly worded contract can shift all liability to that company in the event of a lawsuit. And do you know whats good about that? That company doesn't own any assets and it's only income is 10% of it's managed portfolios gross rents. There would be nothing for anyone to take.
There is this concept of piercing the corporate veil, and I seen it done with lethal effect.
If the intention is to shift legal liability, the problem is there is a LLC management company, and there is someone in the management company working as the property manager, who may be the principal of the management company. Now, if you hired an outside management company, paid the monthly fees, the PM would have his own E&O insurance. You'll be off the hook.
I bought a business from a couple who operated via an S Corp. They were assured the S Corp would shield them. Then came a $3 million lawsuit, they only had $1 million liability coverage, and the bad news was, the S Corp and they were sued personally. They tried to get the personal part dismissed, it was turned down, and proceeded to trial that way, with them personally and the S Corp.
I followed the case, as my employees were called in for depositions, and they ask about how active the owner is, and was told he was there every day running the business. Fortunately, they moved to FL, and put most of the proceeds into their home there, and due to FL homestead laws, can't be touched, so the plaintiffs settled for the $1 million.
Spoke to lawyers, he actually had a manager on the payroll, had he stayed home and slept, things would be different. The corporate shield didn't protect them, FL homestead laws did.
@Frank Chin
Very interesting!
Was the veil pierced because the S-corp wasnt truly being run like a seperate entity (commingling of assets, not signing docs properly, not holding meetings, ect)?
@Frank Chin
Very interesting!
Was the veil pierced because the S-corp wasnt truly being run like a seperate entity (commingling of assets, not signing docs properly, not holding meetings, ect)?
Based on what I heard from my employees, they were concentrating on his management, not on the technicalities of corporate governance. With liability insurance, at least the companies I used, they provide legal representation with the coverage. In this case, the owner was told to separately get legal representation for himself, since the insurance company only represents the S Corp. So I'm not sure whether there's an issue of the conflict of interest. But in my case, I had an endorsement in my corporate liability coverage that covers me personally, which he didn't have.
I had S Corps, C Corps as well as LLC's, and if people dig deep enough, they'll get into issue of co-mingling, not holding annual meeting etc., which is why I rely more on insurance. I mainly use these vehicles for tax and accounting purposes. Years ago, I checked into it, and there are services that check for such compliance for you, and even write up annual meetings i.e. minutes of meetings etc. though I'm not sure you have to actually hold one.
OP is using it for anonymity, and in the rental business, when something happens, you got no one to call, and to me that makes for negligence and an insurance risk.
@Michael Ablan @Kevin Lefeuvre Owning a property personally, and setting up a management company entity to manage the properties does Nothing to shield the owner from liability. The owner is Still the owner, and no agreement between the Owner and his management company has any effect on liability to a third party by the Owner. While yes, the llc is Suppose to indemnify the Owner, that doesn’t stop anyone from getting a judgment against the Owner.....it’s not the third party’s problem that the llc can’t make the Owner whole, that’s the Owner’s problem, the third party still gets a judgment against the Owner and the llc management company. There’s not even a need to pierce any entity liability as the Owner and llc management company are two separate defendants.
@michael ablin
this seems to me as the best mechanism. Do you know if that LLC needs to have a PM license? Or since the owner will never sue the PM, they don't need a license... I guess the LLC does need a PM license.
@frank chin
"anonymity" in legal terms means not exposing the details of the ownership of the LLC. Obviously there's a need for contact information for the LLC company.
Your point about piercing the corporate veil is nothing specific to real estate. I have owned and run all sort of corporations in the past, and if things are not setup and run properly, personal responsibilities of officers can always be invoked. The key is to make the legal entity act as a separate entity. Having an external business manager is one aspect but it's NOT required to prove the entity exists. Separate bank accounts, separate address, email addresses, and of course all corporate formalism like the annual meetings etc. are all important.
I've heard people talk about good insurance many times. I have had a hard time convincing my real estate agent (specialize in homeowner stuff, not investor stuff) to give me investor-specific insurance.
Who are you all using for insurance and what are the limits and types of investor-specific clauses we should be asking for?
The business I bought and it's owner was not in the real estate business, so of course it's not specific to real estate. As a matter of fact, my insurance agent when I bought liability insurance for the business recommended that I also include a endorsement that covers me personally, since it's becoming all too common principals and owner are sued along with their company. I saw one happening, but my impression was she saw quite a few, the way she explained it.
As to "anonymity", for small operations, if you have to register or list person responsible as in NYC, it would most likely be the principal. I got a good laugh when the Trump organization received an inquiry some years ago, Donald Trump called back pretending to be someone else, his press spokesman, but the phone recording plainly sounded like him. You can only fool people for so long.
As to licenses, in NYS, you need a broker's license to be a PM, but you don't need one self managing. The license attaches to a person, not an LLC. But I can hire a licensed broker to work for me at my LLC if I'm not licensed.
The business I bought and it's owner was not in the real estate business, so of course it's not specific to real estate. As a matter of fact, my insurance agent when I bought liability insurance for the business recommended that I also include a endorsement that covers me personally, since it's becoming all too common principals and owner are sued along with their company. I saw one happening, but my impression was she saw quite a few, the way she explained it.
As to "anonymity", for small operations, if you have to register or list person responsible as in NYC, it would most likely be the principal. I got a good laugh when the Trump organization received an inquiry some years ago, Donald Trump called back pretending to be someone else, his press spokesman, but the phone recording plainly sounded like him. You can only fool people for so long.
As to licenses, in NYS, you need a broker's license to be a PM, but you don't need one self managing. The license attaches to a person, not an LLC. But I can hire a licensed broker to work for me at my LLC if I'm not licensed.
One more time, I am neither trying to fool anyone or doing something unfair to a tenant. Your analogy with Trump and keeping repeating the same points are irrelevant and inappropriate. It looks like that's your mind set, not everyone thinks that way.
The business I bought and it's owner was not in the real estate business, so of course it's not specific to real estate. As a matter of fact, my insurance agent when I bought liability insurance for the business recommended that I also include a endorsement that covers me personally, since it's becoming all too common principals and owner are sued along with their company. I saw one happening, but my impression was she saw quite a few, the way she explained it.
As to "anonymity", for small operations, if you have to register or list person responsible as in NYC, it would most likely be the principal. I got a good laugh when the Trump organization received an inquiry some years ago, Donald Trump called back pretending to be someone else, his press spokesman, but the phone recording plainly sounded like him. You can only fool people for so long.
As to licenses, in NYS, you need a broker's license to be a PM, but you don't need one self managing. The license attaches to a person, not an LLC. But I can hire a licensed broker to work for me at my LLC if I'm not licensed.
One more time, I am neither trying to fool anyone or doing something unfair to a tenant. Your analogy with Trump and keeping repeating the same points are irrelevant and inappropriate. It looks like that's your mind set, not everyone thinks that way.
Nope, never said you tried to do anything unfair or inappropriate. Mentioned Trump since I thought he was quite funny, but it seems people gets upset whenever I mentioned his name. If that upsets you, so sorry.
An LLC for each property is generally considered an overkill, unless they are large commercial properties or apartments. A common solution is a Series LLC: basically one mothership LLC with compartments (Series) for each property. California does not have a state statute recognizing Series LLCs, as far as my non-attorney limited knowledge goes, but it allows out-of-state ("foreign") Series LLC to be registered. This setup is for a CA-licensed attorney to address. I'm sure you will never get two attorneys to agree on the benefits and pitfalls of Series LLCs in general, much less on the risks of using an out-of-state LLC in CA. @Scott Smith is one attorney who loves them to death.
Outside of Series LLC, you can create various trusts, including land trusts, to fortify your asset protection and provide anonymity. This is also for attorneys, and I'm not one of them (luckily).
For practical purposes and tax purposes, a management LLC is a very common setup for multiple properties under common ownership. Details do matter though.
An LLC for each property is generally considered an overkill, unless they are large commercial properties or apartments. A common solution is a Series LLC: basically one mothership LLC with compartments (Series) for each property. California does not have a state statute recognizing Series LLCs, as far as my non-attorney limited knowledge goes, but it allows out-of-state ("foreign") Series LLC to be registered. This setup is for a CA-licensed attorney to address. I'm sure you will never get two attorneys to agree on the benefits and pitfalls of Series LLCs in general, much less on the risks of using an out-of-state LLC in CA. @Scott Smith is one attorney who loves them to death.
Outside of Series LLC, you can create various trusts, including land trusts, to fortify your asset protection and provide anonymity. This is also for attorneys, and I'm not one of them (luckily).
For practical purposes and tax purposes, a management LLC is a very common setup for multiple properties under common ownership. Details do matter though.
While I do love Series LLCs in regards to their ability to protect growing portfolios, California gets a special exception. California has extended their franchise tax beyond simply applying to individual LLCs, but the tax can also apply to each individual child series within a parent Series LLC. The best strategy I have seen in California to both protect assets and not drive you financially into the ground is the Delaware Statutory Trust. Setting up an asset protection strategy around this entity can save you from paying the franchise fees since it is a disregarded entity, but you can still introduce liability protection into the structure. The article covers it in a bit more detail.
The biggest obstacle is that the DST is more difficult to establish and will often cost a bit more to establish up-front. I find that it pays off the difference within 1-4 years of creating based off of the savings you accrue by not having to deal with the annual fees - the difference depends on how many assets you own. The biggest benefit of the DST is that it also has the "child" series function, allowing you the ability to scale your portfolio without having to create brand new entities each time.
Thanks @Michael Plaks and @Scott Smith
I had read the series LLC and more generally any entity holding the RE. I have made my decision long time ago and don't have enough reason to change it, regarding holding properties directly, having max debt on them and great insurance. That's my strategy, and have no intention to change.
The question here was about the validity of a LLC to manage the property on my behalf. Most liabilitiy issues are about negligence and related to management not the ownership of the stone/brick/mortar. Any opinion about my question which was : "Creating a LLC just to rent and manage property". I would mandate my LLC to run the business of rental of my property. This is similar to licencing a trademark or a patent in a territory to a corporation, in terms of business law. Why wouldn't be able to do the same in RE? That was my question.
Hi @Kevin Lefeuvre, there are a lot of non-lawyers guessing at the law here, as usual on this site. But I am going to take a stab at what I think you are asking. I think you are asking whether you can form an LLC to manage real property, which is a different LLC than you may or may not have formed to hold property.
This is a tricky area of brokerage law. In California, a company that manages property must employ a real estate broker whose license is associated with the management activity. There is a loophole here in that the company is not receiving compensation because the LLC member is actually the owner of the property. And a brokers license is required by definition when there is compensation for property management. What happens when the company is not paid for the management? This is where the discussions about piercing the corporate veil become real. Because if the company is not paid, then it appears to be a shell where the owner is hiding. But maybe not. it really depends on how the operating agreement is written.
However, to avoid this ambiguity, its usual that the LLC own the property. (I'm assuming that youre not a real estate broker)
Hi @Kevin Lefeuvre, there are a lot of non-lawyers guessing at the law here, as usual on this site. But I am going to take a stab at what I think you are asking. I think you are asking whether you can form an LLC to manage real property, which is a different LLC than you may or may not have formed to hold property.
What happens when the company is not paid for the management? This is where the discussions about piercing the corporate veil become real. Because if the company is not paid, then it appears to be a shell where the owner is hiding. But maybe not. it really depends on how the operating agreement is written.
However, to avoid this ambiguity, its usual that the LLC own the property. (I'm assuming that youre not a real estate broker)
Yes you got it.
No I don't want the LLC to own the property as said above.
The fact PM is paid or not is important in the PM-Owner relationship where there is no risk of dispute. The PM (LLC) is basically representing the owner vis-a-vis the tenant. Not sure where this is violating the tenants rights.
Thanks for your detailed contribution Jennifer.