All Forum Posts by: Luis Alvarez

@Noman Aslami It would depend on the entity you chose, which it sounds like you did already?? But to @Basit Siddiqi's point, it's something that can be obtained from the IRS and we always make sure that we obtain the immediately-available PDF so you have the EIN right away, rather than opting for the letter delivery, which takes a couple weeks from the IRS.

To the other point, the question is whether the volume of the activities will justify the entity being taxed as an s-corp. But something for you and a CPA to review. Also, keep in mind that an LLC has tax flexibility, which means you can choose (with guidance from a CPA) on how to treat it for taxes to maximize tax savings.

@Tam Nguyen Sorry to interject, but to your reply right above, no, you should not have State #1 LLC send funds to State #2 LLC or vice versa. However, since they would both be owned by your holding LLC, they can each "kick up" directly to the holding LLC.

To the point made by @Charley Gates, having a record of annual "minutes" is another added (and thorough) layer of your annual corporate maintenance to have as proof that you are in fact treating the LLC entity as its own separate entity, and not an alter ego of yourself. The reason I put minutes in quotation marks is because your recording of minutes does not need to be anything super complex. We usually prep what's called Unanimous Consent in Lieu of Annual Minutes for folks and it pretty much just bullet points the high level activity of the entity over the last year.

Chime back if you have any other q's.

@Joyce Kim I see this thread is a bit dated, and you're likely upon closing (if you haven't already), but just to provide a respectful counterpoint to what many take and run with: covering initial expenses from your personal account is fine (even in most court's eyes) since these would be considered founding member costs and you would just "reimburse" your personal account once you have your LLC account established and (properly) funded. Keep in mind that commingling is the easiest ways to make your LLC pointless, and to that point, as I've posted in other threads:

Do you need an LLC?  We would NEVER, EVER, recommend owning a rental property in any individual name/capacity. The properties need to be deeded over (with full Grant Deeds, not Quitclaim Deeds, to provide full rights and full title rights) to the LLC. Not having an LLC in CA, especially because of the tenant friendly statutes and case law is just inexcusable. Even if the annual filing fee was $1,600, it would still be worth the peace of mind. This is a cost of doing business as a real estate investor. All the asset protection and legacy plans I've come across utilize LLCs to properly compartmentalize your assets and to transfer assets easily when needed.

The Due on Sale Clause, "BUT the due on sale clause....etc...etc..." yes, some version of this is found in every modern day mortgage, however, there are documented and regulatory exceptions for transferring title to property and NOT triggering Due on Sale....especially when the purpose of the transfer is to entities for the sake of estate planning/asset protection. You just have to have the knowledge of where this is found and if and when the lender ever finds this (which they don't) then a half page letter citing the exception and a brief explanation covers this. This is not an issue.

To Umbrella Insurance as protection, while you want landlord insurance coverage, as well as an umbrella policy. Please repeat after me: insurance does not protect you from liability...it only pays the litigation costs and damages once you've already been found liable/negligent and have a judgment in your personal name (if you didn't change title on that rental property and a cause of action). That being said, an LLC DOES NOT make the property immune from liability...it does however, limit/contain it to the assets within that same LLC. This is something that is unfortunately vastly misunderstood throughout the real estate investor world. Generally, an umbrella policy covers any excess damages that haven't already been paid by your underlying policies, but those policies need to pay in the first place, and then the umbrella kicks in. I have insurances (landlord and umbrella) in place for my properties, but I know how insurance companies stay profitable (by only paying claims that they absolutely must pay). Keep in mind that these policies are drafted by sophisticated attorneys and drafters and typically have precise language and exclusions. How often do investors actually read through an entire policy and understand the exclusions? I can tell you that attorneys sometimes don't even read them...

@Mark Nguyen To echo what the others have mentioned, there are a LOT of factors and considerations to keep in mind when these documents are drafted. That's not to discourage you, because with it properly being set up, the business venture can be well-organized and problem free.

Without knowing more details from both you and your sister's situations, we would typically recommend that each of you form your own LLC (in your corresponding states of residence) to act as your "business venture" entity. Then form a Partnership, with each of you and your sister's own LLCs acting as the partners of that Partnership. Depending on some other factors, we would either be able to set up a General or Limited Partnership (although a Limited would be preferred and has a couple more steps to it). You would want to have a thorough partnership agreement to include anything and everything in the way of scenarios that could happen.

Lastly, we would probably put an occupancy agreement in place for you (as you'll be living in the property), this will protect you as a "tenant" and the partnership as the "landlord".

@Tam Nguyen

To your questions:

1. Yes, from a legal standpoint (not sure about for finances, which it sounds like your primary concern is with this), it does matter how capitalization happens. In short, adding little bits of money at a time would (in retrospect) have a court consider the entity as an alter ego of yourself (and your partners) and subsequently "pierce the corporate veil". Which means the limitation to liability that LLCs shield you from would be collapsed by the court becuase of inadequate capitalization. However, this only matters if/when any of the assets held by said LLC are jeopardized or facing litigation.

2. Electronic records/statements should suffice since they are no different than deposit slips. The deposit slip only reflects what the  entry was, which is reflected on the statements.

3. You would want to reflect capital contributions from all members in annual minutes (hint: these are not necessary, but a great way to keep up with the corporate maintenance of the LLC, which is a way to keep the "corporate veil". You can memorialize the annual "minutes" by having a professional draft what's called a unanimous consent in lieu of annual minutes. This documents basically outlines the bullet points of important events/activity of the LLC over the last year.

4. Not sure about what tax advantages you are concerned with compromising by creating a loan between the LLC and yourself (perhaps the others on this thread can chime in with their tax knowledge), but from a papering standpoint, drafting up a Promissory Note from (or to) the LLC from the individual is something that's very plausible and many investors I've worked with (myself included) have used this as a tool.

@Hector Lewis from an estate planning/asset protection background I'd say "it depends" (to echo the comments above that not one size fits all), but it depends on the elaboration to your question. Are you asking where do you establish an LLC which will serve to hold your property(ies) or the LLC which will serve as your overall business entity.

Firstly, we typically set people up with a "holding" LLC, formed in your home state, because that's where you live and "receive income". So, for state tax compliance (typically) you will want to have your overarching business entity in the state in which you reside and file your state taxes.

Secondly, you would want sub LLCs to own properties, with the LLC being formed in the state where the property(ies) is/are located. (EG you have a rental property in TX, an LLC in TX should be formed and then the property transferred into that LLC). And yes, we recommend establishing LLCs in various states because having a TX property held by a (for example) CA LLC will not avail your TX property to the laws and protections of TX property law. And with real estate, the commanding laws are state-based.

But most importantly, LLCs are great ways to limit your liability...but ONLY if they are set up properly and maintained properly with the relevant governing agencies. When things are designed and set up properly, you can have a solid asset protection structure, but speaking from experience, a small percentage of attorneys and CPAs know how to structure these.  Be sure to do your due diligence and ask what their clientele looks like and ask to see model asset protection mock-ups.

Feel free to chime back if you have any follow up questions.

Hi Brandon, coming from a former CA born-and-bred resident (and where I began my legal career in) I would respectfully provide you with a different perspective.

Yes, you can just use an umbrella policy, but keep in mind that most umbrella policies only pay out when the underlying policy on the property has already agreed to cover the claim. (Because let's be honest very few people actually read the entire policy document, and of those even fewer people actually understand the legalese in those clauses...) Now, yes, those insurance companies of the underlying policies will fight tooth and nail not to pay, but YOU are the first party they're going to fight. They will use a clause in their policy to deny your claim because you were negligent, should have known better to address an issue, etc.(higher standard for property owners)...think seismic and asbestos cases in CA. The CA Civil Courts system is riddled with these. Not to say that you would purposely act in such ways to create hazards, but many times the owners just don't know what they don't know. Remember: an LLC limits liability, insurance ONLY pays for it once you've already been found liable.

To your numbered points:

1. Different properties in different states should be in LLCs formed in those relevant states because this is how you will avail yourself to the laws/jurisdiction of that state. A CA court is not going to recognize a NY LLC in their court.

2. An LLC provides the most flexibility in tax planning, but sounds like you already know this and as long as you have a solid CPA that knows nuanced structures and keeps up with case law, you should be good.

3. Doesn't really affect the entity choice, but, because of different types of activities (active vs. passive) more the reason to split out different breeds of potential liability sources whilst also making tax planning easier so things aren't mixed.

4. Yes, LLCs can be opened in diff states, and they should when you have properties in diff states.

5. You certainly can leave things the way they are (since it sounds like you have a good foundation so far). It just depends on what future aspirations are.

6. Not only does separate bank accounts help to measure metrics clearly, but most importantly you should never use one account for your different properties. Yes, I know there are plenty of folks that do it, and have done it for many years, etc., etc...but this is the easiest way for a judge/jury to collapse any appearance of you having a separate business entity and seeing straight through it and making all your assets open to liability. Commingling funds is a freebie to a litigating attorney on the other side. 

To close, IMO an $800 annual fee in CA is my price of admission for owning property in CA. As tenant friendly as it is, I would sleep well at night knowing that a well-structured (and maintained) asset protection plan is not going to potentially be the cause why my investments trajectory hit a snag.

To John's point, you would want to separate them out primarily because flipping is an "active" activity and holding is a "passive" activity. This factors in on legal and tax aspects, but for different reasons. Keep in mind that an LLC (when set up properly and all the corporate formalities/documenting are followed) acts as a lead bubble around a particular business endeavor...meaning anything that blows up within that business, the damage is contained to that business alone...and any liabilities that occur outside of that business doesn't penetrate through to affect that business.

To the original questions @Ponni Carlin and @Brittany Guimond, forgive my long-winded, estate planning/asset protection answer, but here's the answers and hopefully the logic behind the 'why':

We are investors because we are conducting business. If you own different properties, in effect, these are all diff business lines of your overall real estate business.  Accordingly, you should have different LLCs for each and every property, and ideally, if you are trying to scale up properly (which it sounds like you're well on your way of doing so) you want to have separate books, accounts, and yes, credit cards for each.  "BUT that means diff accounts....lots of admin...etc...etc" Yes, yes it does. This is what all businesses on large scale do. 

To the LLC topic, when we set up an LLC it means this: include the State registration, pulling an EIN (optional, but to create a truly separate entity, should be done), put together an Operating Agreement (even if you are the sole member, because again, this is part of business formalities necessary to show in a court that you're intention was to make the LLC separate from you personally); and yes, you should open a separate business bank account for the LLC (because comingling funds in an account under your personal name is the easiest way for a suing attorney to collapse the LLC). If you used a personal loan to acquire the property, I would NEVER, EVER, own a rental property in any individual name/capacity. The properties need to be deeded over (with full Grant Deeds, not Quitclaim Deeds, to provide full rights and full title rights) to the LLC.

To the Due on Sale Clause, "BUT the due on sale clause....etc...etc..."  yes, some version of this is found in every modern day mortgage, however, there are documented and regulatory exceptions for transferring title to property and NOT triggering Due on Sale....especially when the purpose of the transfer is to entities for the sake of estate planning/asset protection.  You just have to have the knowledge of where this is found and if and when the lender ever finds this (which they don't) then a half page letter citing the exception and a brief explanation covers this.  This is not an issue.

To Umbrella Insurance as protection, while you want landlord coverage, as well as an umbrella policy. Please repeat after me: insurance does not protect you from liability...it only pays the litigation costs and damages once you've already been found liable/negligent and have a judgment in your personal name (if you didn't change title on that rental property and a cause of action).  That being said, an LLC DOES NOT make the property immune from liability...it does however, limit/contain it to the assets within that same LLC. This is something that is unfortunately vastly misunderstood throughout the real estate investor world. Generally, an umbrella policy covers any excess damages that haven't already been paid by your underlying policies, but those policies need to pay in the first place, and then the umbrella kicks in. I have insurances (landlord and umbrella) in place for my properties, but I know how insurance companies stay profitable (by only paying claims that they absolutely must pay). Keep in mind that these policies are drafted by sophisticated attorneys and drafters and typically have precise language and exclusions. How often do investors actually read through an entire policy and understand the exclusions?  I can tell you that attorneys sometimes don't even read them...

It's nice to hear that some out there have been in the game for decades, have all their properties in their personal names, and nothing catastrophic has ever happened to them. Best wishes and glad to hear that at times, but from my professional experience, having these things in place are less of a "personal preference or opinion" it is just using resulting to validate what we believe is the appropriate course.  You can ride a bike for 20 years without a helmet and never have an issue, therefore, in your experience a helmet is unnecessary...until that time you hit an unexpected pebble, fly over the handle bars and think...wish I had a helmet on. 

Hi @Patrick Melson, what is "good" can vary depending on who you ask. Someone can send you something you find online, but to @Greg Scott's point, unless you have consulted with someone who knows LLC and asset protection nuances in and out (particularly with establishing WY LLCs for presumably the holding entity) you really are gambling with whether it is a good Op Agreement that covers everything for your specific situation.  One thing you learn from reading/researching years and years of statutes and case law is that: "It Depends".  Is this good for me or bad for me? It Depends.  Did I just pierce my corporate veil? It Depends.  

I know a lot of us are trying to get things in order and keeping costs down with rental properties, but I feel that legal is one of those things that easily can be put to the wayside because of the fact that one doesn't see a "return on a dollar" in the immediate term of when it is spent. But wait until that one thing happens, which you prep for not happening, but eventually does happen...and that's when putting the right foundation in place years ahead of time pays in ways that a yearly NOI doesn't even compare to.

That being said, what's the purpose of your WY LLC? Are you a resident there? Is the property located there? Is this just for you? Partners involved? Spouses? Family? Would this be the primary holding 1 property? Or would this be your holding? What's your annual projected revenue looking like? Would you treat this as a pass-through entity? Or S-Corp? Or P-ship for tax purposes? These and more are questions I typically ask of those seeking these answers.