How to Structure LLCs

Question

Hello BP Community!

We have recently acquired a six unit apartment building in Memphis, which is our largest acquisition to date (we also have four SFRs). I want to know the best way to protect my assets. I keep getting the same advice that I should put my properties under an LLC, but that I should set up a separate LLC for each property. The problem with this is I am located in California, and there is a fee of $800/year/LLC. This is more than two months of profit per SFR, and makes my cashflow take a large hit.

Is there a way to have a "main LLC", and multiple "sub LLCs" underneath it, where I would only pay the LLC fee of $800 on the main LLC? Curious to know how other members have structured their business.

Thank you!

Eamonn McElroy · Answer

The CA annual $800 franchise tax is not levied on general partnerships nor on undivided direct interests (TICs).  So, there are ways to avoid it, but pros and cons associated with each option.

As already noted, this is a conversation that needs to be had with your attorney and CPA.

Sean Morrison · Answer

As noted, you're talking about a Series LLC, which only a few states offer. Insurance is your first line of defense. Boost it to a level that keeps your protected. You can create an LLC for that added insulation, but it doesn't need to be one for each property. You can put all your properties under one LLC to separate the properties from your personal assets. You could keep the SFHs in your name, and just put the multi-family into an LLC, since that may have higher liability, or be a more valuable asset.

Katie L. · Answer

@Simon Asraf

California does not recognize series LLCs, so each LLC that is "doing business" in CA will be subject to the $800 fee.  The definition of "doing business" is pretty broad according to the Franchise Tax Board.

There are several considerations that can go into the analysis of whether you need an LLC or whether a large insurance policy will suffice. Will depend on several factors like the type of property, type of tenants, your risk tolerance, other assets you own, your estate planning, laws where the property is located, etc.

Any lawsuits would be limited to the assets of the LLC and not your personal assets (assuming you run the LLC appropriately and the corporate veil is not pierced). But, an LLC will not limit you from liability in total. You can still lose your investment in the LLC. If you're going the umbrella insurance route, make sure it will cover you for several things including just the routine slip and fall (like mold or earthquake). You'll also want to ensure you have a good property manager to look after the upkeep of the property if you are not there to notice anything deteriorating or which may need attention.

This article goes into a lot of the considerations about whether to form an LLC or not: https://www.mmpph.com/wp-content/uploads/2019/04/May-2019-newsletter.pdf

Creating an LLC in California would cost you a minimum tax of $800 every year. You would have ongoing filing requirements with the State and would need to keep business records and documentation.

You also want to look at whether a pass-through entity helps your bottom line and your taxes. There is a new 20% pass through deduction you may qualify for that could help you, but not everyone qualifies. You should still be able to get this even if the properties are not in an LLC, if you qualify.

These are all things you will want to discuss with your attorney and CPA. If you need references for either of them in San Diego, let me know.

*This post does not create an attorney-client or CPA-Client relationship.  The information contained in this post is not to be relied upon.  Readers should seek professional advice.

Matt Guignon · Answer

I’m not an attorney, but I know a lot of real estate investors in my locality (Missouri) opt for series LLC. It seems as though this type of structure is more acceptable and protective in some state than others. Essentially it allows you to have a parent or holding LLC with a multitude of “series” beneath it that are each separate and protected, limiting liability without having to continually open individual LLCs. This is advice I’ve gotten from entity formation lawyers in my area, but the quickest and most effective way to answer your question would be by having a meeting or conversation with an attorney in your area and getting the answer “straight from the horses mouth” so to speak. Best wishes in your investing. Liability and protection is crucial in any successful real estate endeavor!

Mike S. · Answer

I believe that there are some solutions with the use of trusts. A trust is not subject to the CA franchise fee. The structure may be something like a trust per property, each trust will have an out of state LLC as beneficiary, and you will have one holding LLC that will own all the sub LLCs. As the owner of the holding LLC (even if out of state), you will probably be subject to the CA franchise fee for that holding only.

Search in this forum, I remember seeing some topics on the subject a few months ago. As I am not investing in CA I never really dug into that specific CA topic.