CPA Suggested Using 2 LLCs

[Troy P.]

Hi all,

I'm relatively new to REI and extremely new to business entities. I took the advice of so many others and sat down with a tax advisor and attorney. I'd like to put the protections in place now to shield current and future assets. My CAP suggested creating a holding LLC for each property and a Property Management LLC to collect and distribute funds. Has anyone heard of this strategy and actually deployed in their own situation? This seems like a management nightmare having to keep track of 10+ books, filings, articles of organization, etc. and I'd like something that I can manage more easily myself. Is it still worthwhile to create a single holding LLC for all properties with a separate PM LLC to perform accounting and true business duties?

[Linda Weygant]

It really depends on your goals.

Creating a PM LLC essentially converts Passive Income to Non Passive Income. The Non Passive Income then becomes subject to Self Employment Tax at 15.3% as well as your regularly bracketed federal and state tax rates. But this isn't necessarily a bad thing.

The non passive income then allows you to contribute to retirement plans based on that income.  Passive income does not allow this.  

Non passive income can also look better to some lenders than passive income, so if you're still in acquisition mode and have no other non passive income, this can also be good.

I'd go back to your CPA and make sure you understand ALL the pros and cons of this structure before moving forward.