All Forum Posts by: Luis Alvarez

Hey @Paul T., wanted to chime in with what you may see as a biased perspective :) If you are okay to share, were you named in an action due to liability inside of your LLC (where your property is owned) or outside liability? Also, do you own the LLC outright? Or do you have a holding company or acting limited partner fulfilling management/operational duties?

But to your point, yes we relay to investors that an LLC only works if you adhere to the corporate maintenance and formalities which were in mind when they were conceptualized in the 80s. In the legal industry there's a term known as "totality of the circumstances"...under this concept, legislation and case law typically outlines multiple factors when making a determination (such as the factors you listed when courts are faced with a decision of piercing the corporate veil). While one of these factors being present on its own may or may not trigger that decision to be made, more importantly the circumstances for each case will be paramount.  We should be treating even the smallest of rental properties as separate businesses.  

When we're asked "do I need an LLC for my rental property?" our opinion is that it's a question akin to the question: "do i need to wear a helmet while riding my bike?". The answer is no...you don't need to.  And you can probably ride your bike all the time as long as you are careful and alert and nothing will happen.  Until that time when something does happen and you wonder...maybe I should've had a helmet on?  And to the maintenance part of it...having an LLC, but not properly maintained would be like having a helmet on without the strap being clicked in.  To us, it's never a question of an LLC or umbrella policy...it's both...and more.  Peace of mind is difficult to monetize.

I hope all goes well with that action you're facing.  There's always an exception to every rule and keep in mind that a plaintiff attorney's role is to throw everything at the wall and see what sticks.  There is a purposeful strategy to name as many defendants as possible to hedge their bets...even if only one defendant may remain through discovery and pre-trial motions.

Hey @Corey Duran, 

Wanted to share my experience/background from estate planning/asset protection pov:  

Personally, I have a similar structure, although I would probably separate the passive entities (rentals) from the active entities (flips, music production, etc.) because once you get to a certain level of revenue, I would want to not only capitalize on an S-Corp election (and all those tax advantages) but also separate the liability one naturally incurs on "active" businesses vs. "passive" businesses.  (But that could be a thread onto itself).

Regarding the biggest issue here, using one bank account for only the holding LLC will save you a lot of extra admin work and bookkeeping, however, if I were a plaintiff attorney in a lawsuit where you are the defendant, the co-mingling of your funds amongst all your entities would be a easy way to show to the court that these entities aren't being treated separate and are ultimately an alter ego for you, in an individual capacity, and your structures (and underlying assets) could be folded into one big pot to pay out a claim. To @Erik D.'s point, if you can deposit checks made out to different entities into your holding LLC (and you can get the financial institution on board), then yes, it's a lot easier from an admin standpoint.  While your tax consideration is inconsequential because they would all go to your personal tax returns anyways, from a legal standpoint, we would point out that this approach would have you in a similar position as if you had all these properties and business owned in your personal name.

I know there's a LOT of contradictory commentary on BP and the interned regarding LLCs and what they do and what they don't...one easy thing to keep in mind is that for tax purposes, the IRS doesn't recognize LLCs...tax treatment is either a sole prop, partnership, or an S-Corp.  LLCs are strictly a legal asset protection tool...so long as certain corporate maintenance and formalities are adhered to.  One of those is keeping separate accounts. 

This is not specific legal or tax advice, but just observations from my unique perspective in planning and asset protection. Hope this helps :)

Also, @V.G Jason makes a great point, this "sisters" or "two child" LLCs approach is found in many family legacy planning structures where you have a Limited Partnership be the holding entity of all sub-LLCs (owning your properties) and that Limited Partnership is owned by two entities: the 1st is a General Partner (usually owning a minority interest like 2%) and the 2nd is a Limited Partner (owning the remaining 98%).  This offsets the active part of the business/operations to the General Partner, who only owns minimal amount of the share of assets, and the Limited Partner is essentially a silent partner who does not take part in operations, thus, further limiting liability, whilst kicking up the lion's share of the revenue.

Hey @Steven Medina

Just to share some insight from an estate planning/asset protection perspective:

I personally use a version of the structure your attorney suggested, while it is definitely adding layers of complexity, I see having all these entities as shields over your rental properties from both inside and outside liabilities. The added layers to accounting, in my opinion, is the price of admission…but as long as you have organizational systems in place then it should be straightforward accounting come year end.

RE Lenders having issues with LLCs: this is probably the biggest factor to take into account. But as you mentioned, there are exceptions that have been recognized by F/F when it’s done for asset protection/estate planning purposes. Ultimately, each lender has their own quirks regarding properties held in LLCs, and those are always fluid as well. In our experience, connecting with the right loan officer/underwriter (who understand the reasons for having properties in entities) does wonders. These entities would typically be “pass through” entities for tax purposes and thus the profits/losses would go directly onto your (and your wife’s) returns.

RE Owner Input/Draws: Yes, the most important part of proper entity structure is the "corporate maintenance" or "formalities" that must be followed so that an LLC is actually seen as a separate business from your person if looked at by a presiding Judge/Jury. This includes proper capitalization (IE if you are contributing $50 here, $100 there, to your holding LLC and then to the sub-LLCs…that won't look good). You want to make sure that every entity has sufficient capitalization to operate independently without the owners having the infuse it every few weeks.

RE Additional Tax Prep Fees: Again, being that they will likely be pass-through, these costs should be manageable. If they are not pass through, and at some point it makes sense to do an S-Corp election for the holding LLC, I'm sure if you ask CPAs niched in real estate, they would say the savings outweigh the costs. (Caveat: S-Corps are pricier for many reasons and CPAs typically recommend a certain revenue level before making that election)

RE Does it really have the protections that are worth the effort? In my opinion putting rental properties in an LLC and then having a holding LLC is like driving during the day, with your seat belt on, 5 mph under the speed limit…do you need to do all this? The short answer is no. You don't need to do any of these while driving (except the seat belt by law, although you can still choose to break it), and you can probably drive many times like this without consequence. Except for that one instance that comes along that you wish you had done of these to help mitigate the damage. I have a similar setup and we recommend similar setups because we like to have as much peace of mind as possible…even if that means a few more spreadsheets.

Sorry for the run on sentences, I think it's endemic of all legal minds :)  Hope that helps.

@Lais Keese 

I jumped into the Indy market last year, and as an out of state investor from L.A. who is familiar with rougher neighborhoods, I realized quickly that in Indy the rougher parts aren't necessarily always apparent right off the bat. This is likely due to many homes being of similar architecture types. During my two trips out there, getting a rental car and driving the streets was the best way for me to get a feel for it...before going I also utilized Google Maps street view (albeit these images are mostly dated).

Property prices out here (in CA) and unfavorable landlord treatment in general made considering to Indy easy. Best of luck!

Thank you! @Lee Ripma

Late to the thread, but @Lee Ripma would you mind sharing with me as well pls? Thanks!

Great observation and perspective to provide!

@Thanh Nguyen Hey, I'm also OOS...did you end up connecting with either of the mentioned lenders? If so, would it be too much trouble to shoot experiences/recommendations? Thanks!

Late to the thread, and don't mean to hijack @Paul Singer , but wondering if I can PM a couple of you in regards to an Indy conventional lender (friendly/familiar to investors)? 

I have already been in contact with Shawn Huss over at Chemical Bank thus far.

Thanks!