I am buying a Property under an LLC, Do I use the LLC for Leases?

Question

Hey everyone,

I am buying a 6 unit property under an LLC, when I write up leases do I sign them all under my LLC name? Also do I need to start separate bank accounts under my LLC name and keep everything separate from my personal name? Any advice going forward? new to commercial real estate and owning a business.

Thank You!

Scott Smith · Answer

@Jonathan Masiello In my opinion I would keep the two separate!  You can technically use the same LLC but would it be in your best interest to expose the LLC name that holds your assets to a renter?  I advise all of my clients to have one entity for asset holding and another separate entity to use as a shell company to be their face to the world - enter into contracts, etc.

Mitch Messer · Answer

Hi @Jonathan Masiello and congratulations on the pending acquisition!

I would strongly urge you NOT to have the same entity that owns the 6-plex be the signer on the leases. Landlords eventually get sued, and, from a liability standpoint, you don't want your leasing entity to own any real assets that could be tied up in a lawsuit.

Honestly, I would encourage you to have the property professionally managed, so this wouldn't even be an issue. But, if you were to insist, I'd suggest forming a separate management LLC that signs all the leases, pays all property taxes and insurance, and generally serves as the public face of your commercial enterprise. This management LLC would own exactly nothing of value!

Now that you're accumulating assets, you'll want to explore advanced asset protection and entity structuring strategies. For my money, Dyches Boddiford is the best trainer out there. Google him for his website and his Corporate Fortress course.

For the record, I receive ZERO compensation for making this recommendation. I'm just a huge fan and very loyal client!

Stan Butler · Answer

@Scott Smith is providing some good guidance here.  How most of the experienced people in my area do things:

• Title Holding Entity setup as LLC (Partnership)
• Property Management Entity setup as LLC (S-Corp)
• Title Holding Entity signs Management Agreement with Property Management Entity
• All property management functions (leases, etc.) done through Property Management Entity
• Property Management Entity charges reasonable management fee (10%)

Even though you may be a party to all the corporations, treat them as if they are unrelated business entities.  That helps keep things on the up-and-up.

Scott Smith · Answer

I will expand a bit on the ideal structure, as there were some questions based off the last comment. As I mentioned above, a strong strategy would separate the liability between your asset and the operations that take place. You would do this by housing the asset in one LLC which functions on it's own, and then use a completely separate LLC as an operating company to conduct the highest liability actions. There are laws and requirements about how these companies must be operated, but it is essentially like creating a company that acts as your own management company - signs the leases, collects checks, pays the contractors, etc. If there is any legal action based on these activities it would implicate the operating company. You would just write out how these different entities are structured in their operating agreements and be sure to have great bookkeeping. @Jonathan Masiello You've pretty much got it. Once you have the entities established you will want to ensure that they are operated correctly, but it does not take long to pull that together. I will also shoot you the name of a great CPA  I work with in a DM.

Mitch Messer · Answer

@Mike Lattier @Jason D. Engaging a property manager would not remove an owner from all liability, certainly, but it absolutely could minimize liability from the kinds of lawsuits tenants frequently file.

Scenario A: Let's say I, as property owner, self-manage my rental and end up violating Fair Housing laws. A tenant is harmed and a lawsuit is filed. I'm liable, yes?

Scenario B: Now let's say I, still as owner, instead hire a perfectly reputable property management company in good faith and that PM then goes on to willfully violate Fair Housing laws without my knowledge. A tenant is harmed and a lawsuit is filed.

Now, I'm no lawyer, so I can't speak as to the extent that these two scenarios are different, but surely I as the owner am far less liable in Scenario B.

Therefore, having an intermediary entity (that is not the owner) manage the property does provide SOME reduction in liability for the property owner.

I didn't invent this, by the way: Folks waaay smarter than me with serious assets to lose have been doing it this way for quite a while.

Fortunately, we do have an attorney present: @Scott Smith, what say you?

Scott Smith · Answer

You hit the nail on the head. The goal is to keep your assets protected to the best of your ability, which means you should limit the liability you take on from other people's actions. This way other peoples action's/decision's are legally attached to the operating company rather than the asset that you invested so much time/money/energy into.

Jason D. · Answer

@Jonathan Masiello yes on both accounts. You will sign the leases as an agent or member of the LLC. You should DEFINITELY have separate bank accounts.

Mitch Messer · Answer

Hi @Mike Lattier.

Yes, however a property owner can authorize another entity to manage rental activity on its behalf, as in the case of a property management company and also in a sub-lease. The lease agreement just needs to be signed by the tenant and whatever party is authorized to rent the property.

There is not (at least not in Georgia) any requirement that the property owner must sign the lease.

Jonathan M. · Answer

Thank you everyone!

So what I have gathered, I should buy the property under 1 LLC and start a second to manage the property and sign leases with that LLC name??

@Scott Smith Should I open bank accounts under the LLC that I am buying the property under? and use that bank account for rent-rolls, expenses, etc? that way its separate from tenants and leases.

Anyone know a CPA on biggerpockets for tax and accounting advice?

Thank you again everyone, gaining a-lot of knowledge!

Steve Rozenberg · Answer

@Jonathan Masiello

My understanding is that who ever legally owns the property that is the name that is on everything.

So if the LLC is the legal owner and all the tax certificates then that is who would be the signer for all legal documents

May want to ask your real estate lawyer for correct advice on that if in doubt.  If you sign wrong that could pierce the Corp veil and not protect you possibly so make sure you do it correctly

I am buying a Property under an LLC, Do I use the LLC for Leases?

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