LLCs, S-corps Umbrella (Residential/Commercial)

Investor · Denver, CO · Member since 2016 · 32 posts · 5 votes

7y

I think there are so many opinions on this, but I'll share mine.

I have just a few buy and hold multi-families and an airbnb in one of them. I spent hours pouring over this topic and got all the advice. The CPA says the LLCs are the way to go and the insurance company says the umbrella is the way to go...of course.

After everything was said and done, I just ended up going the umbrella route. It's under $300 for the year and provides 1.3M in coverage after the liability coverage on each of our multi-families. I did end up setting up an LLC for one of the properties, but sometimes the insurance company doesn't want you to double dip with an LLC and won't let you cover a property considered "commercial" with an umbrella.

My understanding is that unless your financials are PRISTINE, any good attorney can crush the wall of protection that the LLC is supposed to provide anyway. That's the main reason I just went with Umbrella coverage as our main protection. That and simplicity.

Good luck! Please share what you did, I would love to hear what you went with!

1 Reply

Raju V.

Investor · Severna Park, MD · Member since 2016 · 32 posts · 39 votes

7y

I would have at least 2 separate LLC's, since they are 2 different businesses. 1 for rentals and 1 for flipping. Also I would have umbrella policy that covers both businesses.

I currently have 2 LLC's filled with buy and hold rentals. I also have an additional 3MM umbrella policy (in addition to the 1MM per unit, so 4MM total) that covers both LLC's.

1 Reply

Mike S.

Investor · Broward County, FL · Member since 2018 · 1k+ posts · 938 votes

7y

You will find different opinions but after all my research I decided the following setting for my own structure. Again it is a matter of choice and what will make you sleep better at night.

I used the following rationales:

I am using a land trust for each property for anonymity (and also for some additional liability protection available in Florida with Florida Land Trusts) and due on sale clause shielding.

Each land trust has, as beneficial owner, an LLC that is in the same state than the property. It allows for the LLC to legally act in that state for any legal action like an eviction. These LLCs are single member. They don't file any taxes are they are pass-through disregarded entities.

All these LLCs are owned by a WY holding LLC.

The reasons for the WY holding LLC are multiple:

- It gives the WY charging order protection to all my sub LLC that may be in states where the protection may not be that great.

- It gives anonymity to the whole structure

- It merge all the tax reporting from the sub LLC to that single structure.

I decided to have this WY LLC as a multi-member for different estate planning reasons and also for additional asset protection. So this LLC is filing an informational tax report 1065 and issues K1 to its members.

If I had multiple properties in the same state, I may have used a series LLC instead if it was available. However, in FL the series LLC does not exist. Some will argue that you may use an out of state series LLC instead and rely on the land trust as the in-state entity. However, I preferred to have the LLC in the same state.

In addition, I created a C-corp to act as property manager and collect rent, pay for repairs, etc... My LLCs are paying that C-corp for its service and I use it to deduct all my expenses and also to get fringe benefits. I may also decide in the future to collect a salary out of it to invest in a retirement plan or to better my W2 for future loan need.

At the end of the day I have two additional tax returns to prepare: one for the C corp and an informational 1065 for the holding LLC.

Each entity has a cost to create and to maintain. Only you can assess if the cost is worth the benefits that you are getting out of it. In my case I believe it was.

I don't have a flipping activity, but for that I would probably have a dedicated S-Corp.

3 Reply

Cameron K.

Investor · Denver, CO · Member since 2016 · 32 posts · 5 votes

7y

Originally posted by @Raju V.:

I currently have 2 LLC's filled with buy and hold rentals. I also have an additional 3MM umbrella policy (in addition to the 1MM per unit, so 4MM total) that covers both LLC's.

I'm curious which insurance company you used to do a personal umbrella policy on a commericial LLC. I found no one who would do that, but it would have been my preference. One LLC with umbrella coverage.

0 Reply

James E Tan

Real Estate Broker · Elk Grove, CA · Member since 2018 · 14 posts · 4 votes

7y

I agree with Raju. Your high risk business is the flipping, I would definitely put that in an LLC. The rental business is not as risky is my opinion, you can mitigate your risk by doing one or the combination of : a. getting an umbrella policy (cheap option) b. creating a LLC ($800 LLC tax in CA and high cost of CPA for filing) c. using a property manager who typically has their own insurance (the tenant will go for the PM first typically).

Hope that helps

James Tan

Bethany Real Estate

1 Reply

Raju V.

Investor · Severna Park, MD · Member since 2016 · 32 posts · 39 votes

7y

Originally posted by @Cameron K.:

Originally posted by @Raju V.:

I currently have 2 LLC's filled with buy and hold rentals. I also have an additional 3MM umbrella policy (in addition to the 1MM per unit, so 4MM total) that covers both LLC's.

I'm curious which insurance company you used to do a personal umbrella policy on a commericial LLC. I found no one who would do that, but it would have been my preference. One LLC with umbrella coverage.

It's not a personally umbrella policy, it's commercial. But I do have a 5MM personal policy, but that does not cover my rentals.

1 Reply

Scott SmithPro Member

Attorney · Austin, TX · Member since 2014 · 1k+ posts · 932 votes

7y

Originally posted by @Russell Gronsky:

Sorry if the below sounds like a rant but this is starting to drive me bananas.

I've been looking to set up some asset protection as I have 11 buy/hold residential rental properties that are scattered across 3 states, as well as a flipping operation in Maryland. I want to protect the flipping business from the rentals, protect the rentals from the flipping stuff, and protect all my assets from my tenants.

I've talked to multiple CPAs and multiple asset protection attorneys and I can't get 2 people to agree on a single thing! Here is some of the advice I've gotten from the professionals:

1. Set up a parent LLC with children LLCs. Each child LLC will hold 1 (or more if I want to save on renewal costs) rental. The taxes will be pass-through so I would only need to file 1 tax return each year.

2. Set up a series LLC instead of a parent/child LLC since with the parent/child structure, you have to file K1s in addition to your annual taxes, so this will cost you more money each year to file my taxes.

3. Set up an S-corp parent with LLCs as children so you can claim a salary as a way to reduce my overall tax burden and I'll only need to file 1 tax return as the S-corp is pass through. Place 1 (or more, if I want) rentals and flips into children LLCs.

4. Don't set up an LLC or an S-Corp. Just make sure you have adequate insurance on each rental property and an umbrella insurance policy. Get builder's risk for the flips and don't worry about being sued on the flips because your GC's license and the subs and their licenses are what would be under fire in a lawsuit since they are doing the work and defects would be their liability.

5. Get a commercial insurance policy that covers each rental and provides an umbrella policy. Get builder's risk insurance for the flips and open an LLC or an S-corp for every property you flip.

At this point, I feel like taking a poll of the audience as about as good as talking to the professionals.

Like I said, I want to protect my rentals from my tenants and the flipping business, I want to protect the flipping business from the rentals, and I'd like to file 1 tax return that doesn't cost me $3,000+ to have prepared each year.

Is this possible or am I asking for too much here? Anyone who has rentals and is flipping, can you help out with some advice on how to set this up?

I will throw in a strategy that I myself implement and have seen many other investors in your situation use. I want to emphasize that you will want to talk anything over with a CPA, I am not giving accounting advice in this post. With that said, having created hundreds of these structures, each piece is built to accommodate the needs of the investor ranging from liability protection to financing and tax streamlining.

For working with a portfolio containing several investments I lean toward the Series LLC. You are assigned a single EIN for your "parent" Series LLC - though if you need you can request additional EINs for the "child" series. You only need to file a single K-1 filing per EIN. In this situation you would need to ensure each "child" series is qualified as an S Corp, which is a discussion for your CPA. This allows you to have each individual property in it's own "child" series of the "parent" Series LLC.

Investors should try and separate their asset classes as much as possible, so if you are doing fix and flips along with buy and holds the ideal would be to separate them into different entities - from the liability point of view. The second reason for this is that fix and flips are taxed different than buy and holds, so they need to be under different EINs. But ultimately you could operate all 11 properties as individual series under a single Series LLC, under a single EIN and requiring one K-1 (once again, this is the idea - may depend on your investments,) and even able to be operating through a single bank account with some stellar bookkeeping.

Your post focused on the "solutions" more than your specific situation, so this information is very generalized. If I had more of your information I could be a bit more specific with the setup concept. The Series LLC is an entity that I have seen work effectively and efficiently for investors with many more properties than you are working with, but with how many options exist I can see where the differing opinions pop up.

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4 Reply

Scott SmithPro Member

Attorney · Austin, TX · Member since 2014 · 1k+ posts · 932 votes

7y

Originally posted by @Mike S.:

You will find different opinions but after all my research I decided the following setting for my own structure. Again it is a matter of choice and what will make you sleep better at night.

I used the following rationales:

I am using a land trust for each property for anonymity (and also for some additional liability protection available in Florida with Florida Land Trusts) and due on sale clause shielding.

Each land trust has, as beneficial owner, an LLC that is in the same state than the property. It allows for the LLC to legally act in that state for any legal action like an eviction. These LLCs are single member. They don't file any taxes are they are pass-through disregarded entities.

All these LLCs are owned by a WY holding LLC.

The reasons for the WY holding LLC are multiple:

- It gives the WY charging order protection to all my sub LLC that may be in states where the protection may not be that great.

- It gives anonymity to the whole structure

- It merge all the tax reporting from the sub LLC to that single structure.

I decided to have this WY LLC as a multi-member for different estate planning reasons and also for additional asset protection. So this LLC is filing an informational tax report 1065 and issues K1 to its members.

If I had multiple properties in the same state, I may have used a series LLC instead if it was available. However, in FL the series LLC does not exist. Some will argue that you may use an out of state series LLC instead and rely on the land trust as the in-state entity. However, I preferred to have the LLC in the same state.

In addition, I created a C-corp to act as property manager and collect rent, pay for repairs, etc... My LLCs are paying that C-corp for its service and I use it to deduct all my expenses and also to get fringe benefits. I may also decide in the future to collect a salary out of it to invest in a retirement plan or to better my W2 for future loan need.

At the end of the day I have two additional tax returns to prepare: one for the C corp and an informational 1065 for the holding LLC.

Each entity has a cost to create and to maintain. Only you can assess if the cost is worth the benefits that you are getting out of it. In my case I believe it was.

I don't have a flipping activity, but for that I would probably have a dedicated S-Corp.

This strategy is spending A LOT of unnecessary time and money with all of the LLCs. Short response:

You use multiple LLCs and we use a Series LLC
- Your model doesn't scale efficiently
- Your model is much more expensive
You is using WY and we use TX
- TX has better fees and less paperwork, and with the use of an agent trust it offers the same anonymity as a WY LLC with all the benefits of filing in Texas
- WY is still really good, though - good call.
You use a C Corp for operations versus traditional LLC - both can do the same thing
- A C corp is wildly expensive and complicated to operate correctly

I would be curious what @Brian Bradley would think about this. You get lots of protection, but it sounds tremendously expensive and like a huge hassle to operate.

Podcast Guest on Show #109

2 Reply

Mike S.

Investor · Broward County, FL · Member since 2018 · 1k+ posts · 938 votes

7y

Originally posted by @Scott Smith:

This strategy is spending A LOT of unnecessary time and money with all of the LLCs. Short response:

You use multiple LLCs and we use a Series LLC
- Your model doesn't scale efficiently
- Your model is much more expensive
You is using WY and we use TX
- TX has better fees and less paperwork, and with the use of an agent trust it offers the same anonymity as a WY LLC with all the benefits of filing in Texas
- WY is still really good, though - good call.
You use a C Corp for operations versus traditional LLC - both can do the same thing
- A C corp is wildly expensive and complicated to operate correctly

I would be curious what @Brian Bradley would think about this. You get lots of protection, but it sounds tremendously expensive and like a huge hassle to operate.

I agree that multiple LLCs are more expensive than a series LLC. However, as I stated, I preferred to have the LLC in the state of the property. Series LLC is not available in the states where I have properties and foreign filing would negate the cost benefit.

I could have used an LLC taxed as a C-corp instead of a full C-corp. The cost difference between both is minimal. I also need to be more careful with the paperwork (shareholder meeting, minutes, etc...). But these are easy to do, you just need to be organized. However I had much less trouble dealing with banks for my C-Corp than for my LLCs.

0 Reply

Scott SmithPro Member

Attorney · Austin, TX · Member since 2014 · 1k+ posts · 932 votes

7y

Originally posted by @Mike S.:

Originally posted by @Scott Smith:

This strategy is spending A LOT of unnecessary time and money with all of the LLCs. Short response:

You use multiple LLCs and we use a Series LLC
- Your model doesn't scale efficiently
- Your model is much more expensive
You is using WY and we use TX
- TX has better fees and less paperwork, and with the use of an agent trust it offers the same anonymity as a WY LLC with all the benefits of filing in Texas
- WY is still really good, though - good call.
You use a C Corp for operations versus traditional LLC - both can do the same thing
- A C corp is wildly expensive and complicated to operate correctly

I would be curious what @Brian Bradley would think about this. You get lots of protection, but it sounds tremendously expensive and like a huge hassle to operate.

I agree that multiple LLCs are more expensive than a series LLC. However, as I stated, I preferred to have the LLC in the state of the property. Series LLC is not available in the states where I have properties and foreign filing would negate the cost benefit.

I could have used an LLC taxed as a C-corp instead of a full C-corp. The cost difference between both is minimal. I also need to be more careful with the paperwork (shareholder meeting, minutes, etc...). But these are easy to do, you just need to be organized. However I had much less trouble dealing with banks for my C-Corp than for my LLCs.

An added benefit of placing individual properties into a land trust is that if the property is in another state you would not need to pay the foreign filing tax on it. The land trust would be formed within the state of the property, and would be housed within the Texas SLLC. In this case, the only time you would be saving money on the filing fee until the event of a legal action, at which point the land trust would be revoked. At this point, it is a small price to pay for the filing fee and you get the strength of backing the property with a Texas formed LLC. When discussing 11+ properties, this is a large cost difference.

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1 Reply

Brian Bradley

Attorney · Wilsonville, OR · Member since 2017 · 504 posts · 411 votes

7y

@Russell Gronsky asset protection can be very jurisdictionally driven. MD recently had a 2016 unpublished case In Kurz, et al. v. AMCP-1, LLC, denying other states Series LLCs. So though I do like the Series LLC, Asset Protection is going to be client and state specific and situation specific. The more liberal or progressive state you live in then the more likely you will see a judge give very little respect to elaborate asset protection set ups that are out of state. Again, you are in MD an have investments in MD. Possibly want to consider the MD legal system so as not to piss the judges off, and then you can always combine that with a foreign component later on as you grow for ultimate protection.

As an asset holding company, LLCs are better asset holding companies for real estate over S-Corps or C-Corps. In fact, the shares of Corp can be attacked and attached to a judgment, then what good is that Corp? vs LLCs where they have built in limited liability protection. You just need to look up your states independent limited liability shield for LLCs.

Even though you're state does not recognize Series LLCs, you can still set up an out of state Series LLC. You will be attacked the same way an any LLC since the Series LLC is an LLC. By trying to pierce the veil. Now if that is successful, I have no idea what MD would do in relation to charging orders or damage and if they will recognize the separation of the series to stop the bleeding into other series or not. But from the case I sighted above I do not think they will,

So this then is the difference between 'maybe' protection or 'full' protection. An LLC is maybe protection since per its own words it is 'limited' and then subject to that states independent liability shield LLC laws for members, and those states charging orders.

Full protection is an 'exemption' and is automatically protected. An exemption is a right that you have under the law. So you need to talk to an MD lawyer and ask him or her what assets and amounts are exempted in MD. for example @Mike S. is in FL and FL has some really good exemptions and homestead laws. Those are fully protected and you do not have to transfer the assets or hide the. They are exempt from creditors. Then its a jurisdiction game on the rest of your non exempt assets. Anything domestic and you can never out run the constitution and full faith and credit clause. So you look for jurisdictions outside the US like a foreign Asset Protection trust in the cook islands that also has a domestic component.

Ideally what you want is,

1. Insurance,

2. Maximize all your state and federal exemptions (homestead, 401ks, IRAs, Wages, life insurance, annuities etc). Each state has something, you just need to find out what they are and max them out first since they are absolute full protection.

3. Set up an asset protection system for the rest of the non-exempt assets with the different tools we can use to do it (LLC, Series LLC, Land Trusts, Domestic and Foreign Asset Protection Trusts, etc).

But your facts will change and what needs to be protected will change once you max out your exemptions.

2 Reply

Curt Smith

Rental Property Investor · Clarkston, GA · Member since 2012 · 2k+ posts · 1k+ votes

7y

@Russell Gronsky funneling rentals through an S corp was a very very bad idea! I hope you mis described. Also you error ed re parent child llc requires 1065/k1. Only if parent is a multi member. You got several errors in your description so either you're describing not correctly or you have incomplete and eroneous understanding of entities, and more importantly tax implications. Rentals should never run through anything with a corporation in its name. They should always be running through none entity past through to your personal 10:40. So that you enjoy the benefit of depreciation. I've heard of CPAs putting rentals in 2 an S Corp and you have to drop that CPA ASAP they don't know what they're doing.

2 Reply

Russell Gronsky

OP

Specialist · Baltimore, MD · Member since 2016 · 384 posts · 318 votes

7y

@Curt Smith, thanks for the fact check. I was frustrated while typing out the original post so I mixed up a few pieces of info. It makes sense to put rentals into a non-entity.

@Brian Bradley, thanks for the explanation and tips to talk to local attorneys. I didn't think about the ramifications of having an out-of-state asset protection structure in a liberal state.

@Scott Smith, you bring up great benefits of a Texas SLLC. I was looking at a WY LLC before but it sounds like a TX one would be simpler to deal with.

@Mike S., wow. Thanks for the very detailed layout of your plan. It sounds slick and has multiple layers so even if one layer gets pierced, there are additional pieces to get through before someone can really get at the big juicy assets. Definitely sounds like you are not the low-hanging fruit.

@James E Tan, you make a good point. I've had rentals for over 14 years and insurance has worked out quite well and you did remind me that I've been meaning to bump up my umbrella policy coverage.

@Raju V., yes, the umbrella policy gives some good piece of mind and I've been meaning to bump up mine.

@Cameron K., definitely important to keep the books separate between personal and LLC expenses. Otherwise, everything is wasted, for sure.

1 Reply

LLCs, S-corps Umbrella (Residential/Commercial)

LLCs, S-corps Umbrella (Residential/Commercial)

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