All Forum Posts by: Jason Marino

Hi Theodor,

I agree with the post above. A Trust is usually a better option for investors that would like anonymity versus an LLC, as many types of Trusts do not require the filing or registration that LLCs need to comply with. You can additionally pair Trusts with LLCs in a structure if you want the benefits of anonymity as well as liited liability.

Hi Justin,

Some of the replies above are a bit reductive on the process of piercing the corporate veil and seem to insinuate that it is a common process. This process is determined by a detailed test, which varies significantly based on the law of the State that the LLC is formed in. The process of disregarding an LLC in Delaware is, in fact, fairly uncommon. It would involve the following test.

(1) whether the company was adequately capitalized for the undertaking; (2) whether the LLC was solvent; (3) whether LLC formalities were observed; (4) whether the dominant member(s) siphoned company funds; and (5) whether, in general, the company simply functioned as a façade for the dominant member(s).

The failure of a single element of the test is generally not considered enough to justify piercing the corporate veil. You would need a combination of failures on these elements to pierce the corporate veil successfully.

Hi Jane,

I would not say that the decision to create an entity or not comes down to the number of properties that you own specifically but will more likely be based on your risk aversion. Insurance (homeowners and umbrella) is good to have, but a backup to this if insurance coverage was denied or the issue was not fully covered would be a limited liability vehicle. This will, when the entity is created and maintained properly, isolate the lawsuit to the LLC and not allow it to reach your own personal assets. Another consideration is that you already have some protection due to the loans on the properties. The lawsuit cannot usually reach the property value that is included in the loan, so this makes the prospect of taking the asset much less attractive to seize.

Additionally, as a side note, if you have multiple properties with high equity, placing them in a single LLC is usually not advised, as a judgement on a single property can then reach the other properties if they are all owned in the same entity. The best way to avoid this would be to spread the risk with several LLCs. This isolates the issue to that particular LLC, and it should not spread to the other LLCs or your own personal assets.

Hi Brendan,

I would say that most of the real investors that I have worked with in the past do not use S Corporations as Holding Companies. It is more common to use this entity with active businesses, as a major benefit to the entity involves avoiding the self employment tax. Additionally, you are going to need to comply with more formalities (taxes as well as entity maintenance) for the same level of protection as an LLC if you use an S Corporation.

Hi Tsering,

As noted in the posts above, the main difference between these entities is going to be the tax treatment. I agree that the note above that the S Corporation is more commonly used with active businesses than as a passive Holding Company. Both of the entities have limited liability protections, so that should not be a primary consideration in your decision.

Hi Christian,

I agree with the post above. Filing an LLC or registration of an LLC in a State is dependent on you doing business in that particular State. As noted above, you are unlikely to need to do that in Virginia in these circumstances. If you ever needed to do this, you can foreign register the Wyoming LLC as a foreign entity in Virginia or any other State. You would then need to have 2 registered agents and ensure that you are compliant (in each State). This would add to the maintenance cost of the entity.

Hi Alec,

There are some good considerations set out above. I think that the decision will ultimately come down to your level of risk aversion and your plans for scaling in the future. If your risk tolerance is low, and you plan on acquiring more properties, a limited liability vehicle will probably An asset protection structure is nice to have in order to provide you with more anonymity in ownership as well as a back up to insurance, if or when a policy denies coverage or cannot cover the entire claim.

Hi Lyle,

You are going to get a variety of opinions on BiggerPockets. For asset protection related questions, you should probably speak with an attorney in detail about your current situation and your goals. While I agree that insurance is a great and a necessary defense, it does not have to be your only defense. There are many situations that may not be covered, and insurance companies do not make money by paying out on claims. Placing the ownership of a property in a limited liability vehicle is a good backup option to insurance. With respect to a Trust, it can work as a limited liability entity in a couple of situations. First, you could have an Irrevocable Trust. Many investors do not use this type of entity because there is a fairly high cost to create it, and it usually is administrated by a professional Trustee, which has a cost. You will usually have limited control over the asset when it is transferred into an Irrevocable Trust. Another option would be a Statutory Trust. These are available in multiple States and usually come with the same limited liability of a Corporation. This would be a good option for many investors and you would have control over the entity with low maintenance costs. Alternatively, you could use an LLC. This is a very common way of owning investment property because of the fairly low creation cost and because it usually offers less formalities and maintenance than an S Corporation or a C Corporation.

Hi Daniel,

Some of the posts above brought up some considerations regarding homestead tax exemptions that are good to keep in mind if you decide to make this transfer. Despite what was stated above, an LLC can protect you and isolate your liability when properly created and maintained. Piercing a corporate veil, in many States, involves a specific multiple point test that needs to be passed to show that your entity is really just an extension of the owner. It is not an automatic process that would apply to all single member LLCs. In relation to your question, you would first create the LLC. You could do this yourself if you had the time and ability to do all of the research to do it accurately. The LLC should usually be formed in the State where it owns property, you would then get an EIN for the entity to be able to get a bank account for the LLC, and you should have an Operating Agreement that corresponds to your situation. Once the LLC is completed, you would make a transfer from your name to the LLC via a Deed. Some other things to consider are the fairly high annual franchise tax fees that apply to California LLCs, and you should additionally confirm that the transfer from your name to the LLC will not have a situation in which a transfer tax will apply.

Hi Brandon,

You spoke about 2 of the most common ways to structure a partnership for real estate investment in your post. Generally, the LLC option is going to offer more control and structure over the partnership. The Operating Agreement will have the ability to handle many of the common issues that arise like internal disputes, control, ownership, and payments as well as some other issues that may be useful in case the partnership is terminated like non-disclosure and non-compete clauses. This entity could be used to control and own multiple real estate projects, and it would likely be helpful in providing some organization in a long-term partnership. A Joint Venture Agreement is usually less formal than an Operating Agreement, but it will address many of the same issues that I noted above. This is usually just a contractual agreement, and it is useful in single projects. I will say that it is not always easy to alter a single Joint Venture Agreement document to be broad enough to address all of the issues that may arise in a long-term partnership with multiple projects.