LLC with your spouse??

Question

I recently started an LLC for my real estate portfolio ( I would like to own 100units some day). My wife’s name is under the LLC as a member (although she has no interest in real estate or doing any leg work, etc).

The issue I’m having is the entity of the LLC is under as a sole proprietor (my wife and I file taxes jointly). This was recommended because both my wife’s name and my name are under the mortgage loan we received for our first property. The IRS says we must change the entity to a partnership since it is multi member.

I don’t necessarily want my wife’s name under the LLC, the only reason she is because it was recommended her name be under because her name

Is associated with the loan (that didn’t really make sense to me).

Could someone shred some light on this? Do I have to change to a partnership if my wife and I file taxes jointly? Does her name need to be on the LLC if her name is on the loan? Is there a benefit for her to be on the LLC or would I be better off to just have my name on the LLC?

Thank you.

Basit Siddiqi · Answer

It sounds like a mess of a situation if the title of the property will be transferred to the LLC and the mortgage will still be in the personal names.It really only works when you transfer everything to the LLC from title, mortgage, rent payments, insurance, etc.

Brandon Fuhrman · Answer

@Greg Scott thank you for your response and suggestions, Greg.

Brandon Fuhrman · Answer

@Ashish Acharya thank you for your response, I reached out to a couple local CPA’s in my area to get a more in depth understanding.

Brandon Fuhrman · Answer

@Sean Morrison thanks for the information, Sean. The Deed to the house and mortgage will both be in our names, but my goal would be to get the title transferred to the LLC.

Unless the lender doesn’t require both our names on the LLC, I would prefer it to be just under mine and act as a sole. Unless it is more beneficial for us to act as a partnership. I will definitely do more research and due diligence regarding this.

Sean Morrison · Answer

Disclaimer: I am an attorney, but I am not your attorney. This is not legal advice, just friendly information.

Two members in an LLC is a partnership, regardless of their relationship (though there are legal oddities, especially with asset protection, in community property states). Sometimes there is value in having more than one member when a single-member LLC could be pierced for liability purposes, whereas a partnership LLC would be limited to a charging order. But this all sounds far more advanced than what you're talking about. It's also unclear who owns the house. Is the deed in the LLC's name, and the mortgage in your personal names?

Ashish Acharya · Answer

Yes, multimember LLC needs to file as a partnership. It is by default. You don't have to choose to file as a partnership. Whoever suggested your the multimember LLC did a disservice to you.

And, no the "Entity is not under sole" as you mentioned. You are not understanding how taxes work and that is normal. Maybe find a tax advisor?

With your goals, it will pay off to have a good advisor on your team.

Greg Scott · Answer

With LLCs, you often have to start with the end in mind.   I wanted to reconfigure an LLC once and my lawyer told me it would be far more cost effective to just create a brand new LLC from scratch.  In other words, you may have already baked your cake.

A better question is do you really need an LLC?  In my opinion, they are way over-sold to newbie investors.  If you have a high net worth or are doing risky things, OK. If it is a very expensive asset, sure.  If you have partners, yes.  If you are just doing buy & hold single family with you and your wife, are you sure you need more protection than just good management and smart insurance coverage? Don't forget, you need to maintain properly every LLC. That includes maintaining books and corporate minutes.  Failure to do so, could invalidate the LLC.

Like many, I started by creating an LLC.  After a few years I stopped using it for holding properties and just used it as a management company for passing through expenses relate to managing my overall portfolio.

Talk to a good real estate lawyer who isn't out there trying to sell entities for personalized advice.