Multiple LLCs one for each flip?

Question

Hello BP colleaguesI live in Southern California and from what I hear series LLCs are not recognized by the state of CA. I’ve also read (various sources) that it’s a good idea to create a separate LLC for each investment property (buy and hold or flip), unless of course you have the option to create a series LLC. The min cost payable to CA each year for each LLC is $800 so you can see how quickly that would wipe away any positive cash flow. As far as flipping homes, assuming you create an LLC for each project, what are you doing with that LLC after you sell? I hear you should keep it going just in case there is a lawsuit related to that flipped property, but that would be really cumbersome and in CA really expensive, $800/year at the least. I would love to hear your thoughts on this, and of course, ultimately this is something I would discuss with a legal professional but until then, what are your thoughts.

Leslie Pappas · Answer

Hi @Louis Van Der Westhuizen, I've written some blogs on DSTs if you would like to learn more. Happy to help.https://www.biggerpockets.com/blogs/7993/73151-wha...https://www.biggerpockets.com/blogs/7993-cashingin...

Scott Smith · Answer

@Louis Van Der Westhuizen Hey, great questions!This is an issue I see quite often on the forums. There is way to operate your properties within a protective structure known as a Delaware Statutory Trust. This offers you the same protections of the Series LLC, a structure I am also very familiar with, while allowing you to operate as a trust rather than an incorporated entity such as an LLC - meaning that you avoid the annual franchise fee in California.Delaware law provides that a Delaware Statutory Trust (DST) is an unincorporated association recognized as an entity separates from its owners. While DSTs are formed pursuant to the laws of the State of Delaware, beneficiaries need not live on conduct business in Delaware. In fact, the DST is ideal for the California resident precisely because it avoids the burdensome Franchise Tax.A DST may sue or be sued, and property held in a DST is subject to attachment or execution as if the trust were a corporation. Beneficial owners of a DST are entitled to limitations on personal liability similar to those of a LLC. Assets with inherent liability, such as real estate, should be placed in the Series component of the DST through the individual child series. Other types of assets remain directly in the trust. A DST may even merge or consolidate into one or more outside business entities. Also, creditors of the beneficial owners of a DST may not asset claims against property held in the trust.There is a lot more that goes into the DST which allows it to function in California. Due to its status as a trust and the ability to form child series within the entity, the DST is a fantastic option for both holding property in a way that separates your liability while also saving you expenses. Be sure to check it out or ask some more questions about it. I have had the benefit of assisting with and forming hundreds of DSTs - it is a fantastic option for those living in California!

Louis Van Der Westhuizen · Answer

@Leslie Pappas thanks for the input and links to your blog. From my quick read, it looks like DST as referenced in your blog is a concept of fractional ownership in larger commercial scale properties that are managed in a DST. I'm not there yet. In my situation, I would be acquiring properties to flip or to hold rather than "invest" funds for fractional ownership of the larger pie. If I'm not mistaken, what @Scott Smith is telling me is that I would have the option to use a DST similar to how a series LLC is used, I believe option 1 in the excerpt below. Delaware statutory trusts are formed as private governing agreements under which either (1) property (real, tangible and intangible) is held, managed, administered, invested and/or operated; or (2) business or professional activities for profit are carried on by one or more trustees for the benefit of the trustor entitled to a beneficial interest in the trust property. This is getting way over my head. :) Thanks both for the kind input.

Scott Smith · Answer

One of the great things that stands out about the DST is that it can hold multiple properties in separate "series," which is a similar function to the Series LLC. This allows you to separate liability between the properties you own. It gets a lot more technical, but I would definitely start looking in that direction. The clients that I work with have benefited greats from it.

Louis Van Der Westhuizen · Answer

@Scott Smith Thanks for this thorough answer. I will look into this further. I have read about land trust so I assume the DST is somewhat similar. Thanks again,