How to structure banking with a partner for TIC

Question

My partner and I bought an apartment complex in Ohio as TIC.  We each have our OH LLC that took title as 50/50 TIC.

Now we are trying to figure out how to properly structure banking and money flow.  We are 50/50 TIC, but obviously we can't split the mortgage and other expenses down the middle.  It seems like we will each need a bank account for our OH LLC, but if all the transactions happen in one account, the other account has no activity going on.

Some have mentioned creating a management entity (LLC or C-corp) to handle all the payments of mortgage and other vendors, and distribute the cash flow to each investor.

Is there a better/easier way?

Thank you in advance

Michael Plaks · Answer

@Ki Lee

There're two separate issues here: operations and legal protection. Legal is for attorneys, and I'm not one, so no comment.

Banking can be arranged at least 3 different ways, from the simplest to the most professional.

• Run everything from a bank account attached to one of your LLCs. Essentially, one of you will hold the purse and be responsible for sharing. Minimal cost and hassle, but maximum risk of internal friction.
• Open a new bank account co-owned by the two LLCs if your bank allows it.
• Create a management LLC with its own bank account.

All 3 work for management and for taxes. There very well could be important differences from legal protection angle, so your attorney may scratch some of these options for legal reasons. And, since it is an apartment complex, I would not try so save a few dollars by short-cutting the business setup.

@Alina Trigub suggested consulting a tax attorney. I would not. Those guys are for advanced disputes with the IRS that could lead to litigation. You're not there. Instead, consult tax AND attorney: a tax accountant and a business / asset protection attorney. The former will help with tax planning, and the latter with legal liability protection. Both should be real estate experts.

Frankly, I'm surprised that you're raising these questions after you already bought the property. Better late than never, I guess.

Alina Trigub · Answer

@Ki Lee

Create a management LLC and use it for this and future properties that you hopefully can buy together. Definitely consult tax attorney for best way to structure it.

Eamonn McElroy · Answer

@Michael Plaks

Are you suggesting to now dissolve the two and replace them with a different one with 2 members?

If it's more advantageous, absolutely.  We'd have a tax free re-org based on what has been presented.  Better to do it now rather than years down the road if the current holding structure is sub-par.  And, if the property was recently acquired, we probably won't have to contend with 704(c).

In this case can you direct me to the source of your statement?

Sure, the flush language of R&TC Sec 23101(a): “Doing business” means actively engaging in any transaction for the purpose of financial or pecuniary gain or profit.

Therefore, "doing business" in CA means: actively engaging in any transaction for the purpose of financial or pecuniary gain or profit in CA.

You may disagree with my interpretation.  That's fine, but take a look at CA FTB Pub 3556, particularly the "Doing Business in California" section therein and "Example 1" thereunder.

It's egregious, but it's what we have to work with until the FTB loses in court.

Eamonn McElroy · Answer

No one is addressing the egregious nature of California's taxation of LLCs.  Which matters...a lot.

If you are the manager of your LLC, and you are a CA resident, the LLC is deemed doing business in CA and must file a CA 568 annually and pay the annual $800 CA LLC tax.

If your partner is also a CA resident, he/she will have the same compliance obligation exposure for his/her LLC.

And now, we're going to add a third LLC into the mix?  If both you and your partner are CA residents, that means $2,400 annually in CA LLC tax alone.

A business attorney will help you understand the legal side.  A tax CPA or EA will help you structure everything for tax efficiency and (hopefully) simplicity and low operating burden.

At a bird's eye view, I would say one LLC (or LP) with an operating/partnership agreement would have been optimal.  Simplify...don't add complexity...

David M. · Answer

@Ki Lee

Well, each LLC should have its own bank account anyway...

Yes, you need to create a business structure tying your two entities together.  That can be simply a partnership or a LLC where your two LLC’s are the two members.  The former I believe is what is called for here.  Either way, the operating agreement will spell out how the operation proceeds.  Either entities are treated as a partnership for federal tax filing purposes in your case.  At the end of the year, this entity will spit out a K-1 form allocating your profit/loss to each of your personal LLC’s

You should talk to a professional about this.  As a “teaching point,” you may have covered your legal aspects of ownership/title by doing tenancy in common with your two LLC’s, but I don’t think you covered the accounting/business aspects by not forming a partnership or similar entity first that should have taken Title.  It’s fine that you have your own LLC’s.  That should provide you Woth the flexibility to do other investments with different or additional partners.

That’s my two cents.  Good luck.

Eamonn McElroy · Answer

Respectfully, you're misapplying 17708.03 of the CA Revised LLC Act, and, they're not the same statute.  See subsection e therein.  The CA Revised LLC Act does not govern nexus for CA income tax, the CA Revenue & Tax Code does.

FWIW, I agree with the CA FTB's reading and interpretation of R&TC Sec 23101(a).  That is, an LLC that has operations in State A and management in State B has an economic nexus point with State B.  And...that's not the problem.  The problem is CA's tax regime related to LLCs, particularly the $800 annual LLC tax once nexus is created, regardless of type of activity(ies) performed within CA and activity level.

Until CA voters work to get that changed, it's what CA residents have to contend with.

Michael Plaks · Answer

Thanks for the reference. True, Pub. 3556 provides a straightforward answer - from the FTB's position. And no, I'm not interested in a fight with FTB. Been there, done that, did not win.

However, for the purposes of a purely theoretical discussion, pubs are interpretations, not the law, and their interpretation of 23101(a) sounds like a stretch to me. Besides, it seems to contradict 17708.03 of the same statute. Oh well.

Michael Plaks · Answer

My reading of the CA statute is different from yours, it seems.

http://www.sos.ca.gov/business-programs/business-entities/faqs/

Do I have to qualify or register a foreign (out–of–state or out–of–country) business entity?

Before transacting intrastate business in California the business must first qualify/register with the California Secretary of State. (California Corporations Code section 2105, 15909.02, 16959 or 17708.02.) California Corporations Code sections 191, 15901.02(ai) and 17708.03 define "transacting intrastate" as entering into repeated and successive transactions of its business in this state, other than interstate or foreign commerce.

You may be right, Eamonn. In this case can you direct me to the source of your statement?

Michael Plaks · Answer

They have two LLCs already formed, already closed on the property, already on the title. Are you suggesting to now dissolve the two and replace them with a different one with 2 members?

Eamonn McElroy · Answer

@Michael Plaks

But too late for a single LLC since two have already been formed.

How so?

How to structure banking with a partner for TIC

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