All Forum Posts by: Carl Stenberg

@Brian Willie in case helpful, I made a post about this a few weeks ago: https://www.biggerpockets.com/forums/109/topics/1197194-llc-...

@Fabian Escobar we typically advise clients to create a separate LLC (holding no assets) to act as management company for purposes of creating privity between that entity and the series LLC (which will hold the assets). However, this structure is typically utilized by investors who are looking to purchase multiple assets over the years, if you're just starting out a single LLC could also work (you can always scale your legal structures later).

@Adam Burrows the idea here is to create privity between the investment assets and third parties. As such, third parties (lenders, brokers, tenants etc.) should sign contracts with the Management Company and not the Investment Entity to add an extra layer of protection for the Investment Entity against any lawsuits arising from those contracts. For these reasons (and a few more) we typically don't recommend creating a Management Company as a child series of the Investment Entity. Happy to discuss further - feel free to reach out. 

@Adam Burrows, if the property is deeded into your name at closing, you can transfer the property to your Series LLC via another deed at a later time (I'd recommend using an attorney to make sure that this process is done accurately). However, if you're lender has no issues with you taking the title in your Series LLC at the outset, I would make sure that your loan officer, realtor, title company, etc., knows this is your intention and work with them to have the property transferred to the applicable Series in your Series LLC.
 

*Please note that this post is for general advice only and does not constitute or in any way form an attorney-client relationship between the reader and the maker of this post. 

Typically, yes, but if I may ask, why form an entity in Maryland when buying property in Ohio? I see many investors form a Holding company in their home state and then set up out-of-state entities in the state where they're doing business. However, clarifying the long-term business objectives/strategy is key before finalizing your entity set-up. It also makes things easy when you have a system in place for scaling your portfolio. 

@Guillermo Kennedy, it's certainly possible to use the existing LLC as a joint venture entity; the legally binding agreement here would be amending the existing operating agreement and updating the current cap table to reflect the new members of the joint venture. The operating agreement would address issues such as profit allocation, voting rights and other obligations.

Depending on the exact scope of your intended business plans speaking to an attorney or CPA might also be recommended. 

@Adam Burrows, your entity's "corporate veil" isn't necessarily pierced until determined by a court of law, and the goal is never to give anyone a reason to. As such, it is highly recommended that you keep the entity's bank accounts separate from your personal accounts. Commingling of funds could have legal consequences for your entity's limited liability status. 

A few other LLC "maintenance issues" to think about are: (i) state filings, (ii) corporate transparency act filings, (iii) organizational documents (e.g., a Series LLC should make sure it has the appropriate articles for each Series) and (iv) taxes.

The "holding-operating" strategy makes sense for someone starting in real estate investing. It is fairly low-cost and efficient (you can always scale your entities as you grow; there is no need for an ultracomplex structure at the outset), but it is essential to ensure that entities are appropriately maintained. 

As an attorney, I always recommend that clients establish at least one legal entity (most often an LLC), as investors should not hold real estate or other assets in their own personal names. Placing your real estate assets in an LLC will generate limited liability protection benefits. Not only is this prudent business management but if you're looking to scale down the line, having a creditworthy entity that can take business loans in its own name is a game-changer regarding risk allocation. The strategy shouldn't be either umbrella insurance or an LLC it should be a combination of both at the most cost-effective price. 

@Stuart Udis I think that's a valid point, but in my state, I don't typically see any harm in forming an empty shell Management Co to deal with third parties, given that the filing fee is relatively low, approximately $350. 

As a strategy, I also like the idea of privity between the empty shell and any third parties, keeping them far away from the entity holding the actual assets without trying to pinpoint particular causes of action that could arise against the RE investor.

Overcomplication is indeed an issue, but in this case, I think having, for example, 3 entities instead of two (holdco, investco, and management co) isn't terribly overcomplicated. 

I appreciate the comment, I always enjoy hearing from another RE attorney. 

@ariana alexic - typically, the management company is an empty shell entity (holding no assets) that is used simply for the purpose of dealing with third parties (signing contracts, leases, etc). As such, if you're sued or something similar happens, then in some cases, the theory (at least) is that the law of privity should protect your other entities. I am happy to discuss this further if you'd like, feel free to reach out.