Should I form a Management Company for our Assets?

Question

We are soon to have 4 units between 2 properties and at this time I self manage everything and will continue doing so into the foreseeable future. We've received 2 different legal recommendations and are trying to decide what our best option is. First was to just put each property into its own LLC and have your leases under the ownership company. Second is to put each property into its own LLC but have a contract with a separate management company, which we also own, to further reduce liability. I am assuming that the second option only becomes necessary when we have a lot of units and we are still self-managing. Are there other better options I am missing? What's the best approach with a small number of units, with the intent to grow our portfolio?

Sarah Humbargar · Answer

Thanks for the input. I like the idea of doing a series LLC, we intend to own more in the future so it seems to me like setting up a system now makes sense.

Scott Smith · Answer

An important piece to take into consideration is how many personal assets you have and what the value of the properties you are dealing with. The value of the LLC is that it can separate liability. For anyone with more than two properties it can become very beneficial to use a Series LLC, since you can file all of the "child" series under a single EIN while still holding onto the liability protection. The asset company is essentially the "fall guy" in the case of a law suit, since most of the liability will be held up in that entity. You just need to decide if the cost for that management company is worth the potential of protecting one of your assets (or more, if you pile multiple properties into a single LLC) in the event of a lawsuit.

The reason I encourage people just starting grow their portfolios to go with a stronger company structure at the start is that (1) the beginning is when you make the majority of your mistakes because you are learning and (2) a big loss early on can ruin investing and is often an investing career ender. So it might seem excessive, but for many it is worth it. Just find a good firm to work with who are experienced and will stick with you.

Richard Sherman · Answer

@Sarah Humbargar I am not sure you need either of those yet.  Would not be bad to have an LLC for them, but I would probably not put them in different LLCs unless the equity is over $500k or so, something like that.  You do not need all that complexity yet (i.e. if the LLC is owned by more than 1 person, even if spouses, then you need to file a separate tax return as well etc.

If it were me, I would have 1 LLC with a single owner (even if married) and the income will just be on your Schedule E on your tax return, no need for a separate return.  I would have the leases done with that LLC.  I would make sure to have a good umbrella insurance policy, probably 2 million or so.  That might run you $300-500 a year maybe