Can I have my own LLC manage property owned in my personal name?

[Edgar Perez]

Good day BP,

I currently have one 4-unit rental owned in my personal name and I have a duplex (foreclosure) under contract which will also be owned in my name (to fulfill fannie mae owner occupied requirement).  My question is: even though the property is owned by me the person, can my LLC "manage" the property, ie have the rent made out to the LLC?  

I've had the 4 unit since August and just recently filed the LLC application and am awaiting approval, I've also took the step in obtaining the EIN for the LLC. I am in Kenosha, Wisconsin.

Thanks in advance for any input.

[Ryan Seib]

Yes, it could be tax advantageous to use an LLC. Running all deductions and expenses through an LLC is a lot better than doing so as a sole proprietorship. From the IRS's perspective, they would wonder why to treat you as a sole proprietorship. I would rather not have to do much convincing. Presumably, you have to obtain an EIN for either scenario in order to better legitimate your business expenses. So the extra step of an LLC takes 2 minutes and $130 plus some paperwork. I bet the bank would prefer an LLC bank account than an additional personal account as well. Not that important. Your actual taxable income and deductible business expenses should be the same.

Another category of advantage is as Marcus Auerbach said for marketing and branding.

The real advantage is liability protection. The first thing an LLC management company does is separate certain management aspects of the properties from the ownership. So with the slip and fall case, the LLC could defend the homeowner by pointing to the lease and mgmt agreement where it says the mgmt company is responsible for all maintenance and upkeep including shoveling and salting sidewalks. That could get you as the owner off the hook and shift liability only onto the mgmt company. And since the Mgmt company has no assets other than its bank account, there would be no risk to your personal assets or the properties.

And a pro se plaintiff may not understand how to file a lawsuit at all and may just sue the LLC rather than the owner. Many plaintiffs cannot afford a lawyer or do not want to hire one. So it raises the bar in that way as well. You can also legally obscure your identity as the owner of the property from various public information sources. If applicable, that could help make it less obvious to potential plaintiffs who actually owns the property in the first place. So, they may assume the LLC does.

The major drawbacks with this approach are it will increase complexity and possibly tax filing costs. I would recommend the LLC have a contract with the property owner (you) for example which shifts liability. You would also need to maintain the LLC as with any LLC. And, you would have more than one bank account and need separate books for the LLC. So, for many investors this approach would not yet be worth it. But as you scale, it is definitely something to consider.

On another note, if you are worried about asset protection and have other personal assets or a decent amount of equity in the 4 unit, the LLC strategy is only one line of defense. There are many ways to bolster that. The one I would mention that is probably the best defense is creating a trust. Federal law says you can transfer your properties out of your name into the name of a trust and banks cannot trigger a due on sale mortgage clause or anything like it. Plus, you do not need to record the trust anywhere public so no one can access it unless you let them.