Setting up LLCs Before Getting Started -- Operating AND holding?

[Ian Livaich]

Hello everyone,

I am searching for my first buy & hold investment. I am starting to think that it is in my best interest to set up an LLC to protect my assets and insulate a property from some degree of liability. So, I wanted to get some of your thoughts on this process, especially on setting up holding and operating LLCs. Please feel free to answer any one of these questions.

-Q1: Do you recommend that a new investor set up an LLC before acquiring their first property? I know this is a contested issue and depends on the individual. While I do not have any personal assets right now (currently a graduate student), I want to avoid having to later assign/transfer/sell the property to a LLC and invoking a due-on-sale clause.

-Q2: While I plan on investing in NJ and PA, do you recommend setting up the LLC in the states where you do business or in Delaware? From my experience in law school, I assume Delaware is standard because of the pro-LLC laws there.

-Q3: Do most investors have one LLC per property or multiple LLCs (operating AND holding)?  

-Q4: If the latter, what is the basic structure of operating and holding LLCs? Is the operating LLC basically a project management company where all business involving the property is conducted from that LLC? And the holding company simply holds the asset? Does the operating or holding LLC acquire and finance the deal? Is there a way to set up a deal where the operating LLC does all of the groundwork, communication, and negotiation with the seller but holding LLC acquires the property as part of the deal?

-Q5: What are the advantages of having both the operating and holding LLCs?  Are there any disadvantages, such as additional cost? Does this structure protect your property from legal disputes with the lease because the operating company entered into the lease but still leave the property at risk for accidents that happen on the property as the holding LLC owns the asset?

Thanks,

Ian