All Forum Posts by: Sean Morrison

Disclaimer: I am an attorney, but I am not your attorney. This is not legal advice, just friendly information.

I'll focus my comments just on the legal stuff. Keep in mind that an LLC that does not own the property, does not protect the property owner. If an LLC manages the property, it will provide the LLC owners personal protections arising from management liability, but an attorney is going to target assets (ie the property) and those will be owned by you personally.

The last thing I will say is no matter how it's structured, do not run expenses and income through personal accounts. Life will be much easier and safer with a separate account and accounting. 

Disclaimer: I am an attorney, but I am not your attorney. This is not legal advice, just friendly information.

An LLC shouldn't need a new or amended operating agreement, unless the existing one limits the company to handling just one property. Then it needs to be amended. The rules for amending the agreement should be outlined in the agreement itself. If not, then you'll need to check your state's rules. But essentially, it requires a meeting of the members, and a vote. That meeting is how official decisions are made by the company.

When @Doug Smith says meeting minutes, those refer to the written record of the meeting - who was there, what was discussed and decided on, etc. The meeting could also be about authorizing a new property, and the minutes could reflect that limited authorization. 

Whether you create a new LLC for the new property is a different question. That has to do with liability protection, and there is a ton of talk on these forums about that.

Disclaimer: I am an attorney, but I am not your attorney. This is not legal advice, just friendly information.

Typically, and LLC is an easier vehicle to navigate since it includes the liability protections, plus outlines the agreement between the partners. Keep in mind that the LLC will need to be registered to do business in CA and pay that fee, even if it owns the home and does everything in the other state.

Changing from partnership (or TIC) to LLC and reverse should not have tax ramifications, since the IRS disregards LLCs anyway and considers it a partnership. If the LLC changes to corporate taxation, that will be a change. If you want to move the LLC or change it later, that will depend on the states involved (whether it can be domestication or conversion, which is way beyond this forum post).

If the financing is a necessary piece, then at minimum there should be a comprehensive partnership agreement. A partnership can still be useful, and you could get a DBA for banking purposes.

In my experience, a "simple" business relationship is best done with a detailed "complex" partnership or LLC agreement. That's because a strong agreement outlines the various problems and provides solutions up front. Got a problem? Check the agreement for the solution.

Conversely, a simple agreement leads to a complex relationship, because each time something happens, the parties need to sort it out, which leads to new disagreements. You'll end up spending time coming up with solutions, rather than focusing on making money.

Disclaimer: I am an attorney, but I am not your attorney. This is not legal advice, just friendly information.

As a general rule, real estate holding LLCs should be created in the same state as the property. While some states have better protections for LLCs than others, when it comes to real estate courts only want to recognize local protections. For the NJ LLC to own something in DC, it would need to register as a foreign company in DC. Might as well create a new DC LLC for the added protection since you'll be paying DC anyway.

The rent control issue is one I'm not familiar with. You should definitely weigh that against the protection of an LLC (vs improved insurance).

Disclaimer: I am an attorney, but I am not your attorney. This is not legal advice, just friendly information.

Just a further comment on the primary residence. There's really not much benefit to packaging that with the rental properties and the costs are pretty high. In order to move it to an LLC, you would need to deed the property to the LLC, which gets into due-on-sale issues with the mortgage company (see the many threads on that issue). As an LLC, you could lose any homestead exemptions for property taxes. Insurance rates (both homeowners and flood insurance) could go up significantly. But if you want to do it because you have significant liability concerns, then talk to an attorney first.

As for a trust, the primary benefit will be for probate purposes, so talk to an estate planning attorney about that.

Disclaimer: I am an attorney, but I am not your attorney. This is not legal advice, just friendly information.

Most rental income is considered passive unless the average stay is less than 7 days (there are other things you can do to make it active though). Definitely talk to a CPA about how that works for you. 

Having said that, it is best practice to try to separate passive and active income streams. While it can technically be done under one LLC, it means very careful accounting practices so it's reported right. And with a renter in for 6 months, it sounds like you have probably had both active and passive income flowing through the same LLC for some time now.

The bigger question is what you mean by funneling costs and income through the LLC. The purpose of the LLC is to provide asset protection, but that only works if the LLC owns the property. Otherwise, it sounds like the LLC may be acting as a property manager, which changes everything.

Disclaimer: I am an attorney, but I am not your attorney. This is not legal advice, just friendly information. 

As a general rule, listen to your attorney's advice. They're right in that it's usually best to have separate entities for passive income (rentals) and active income (wholesales, flips). If the active company owns the property it's managing, there's just more liability exposure. The holding company creates another layer between you, your company, and the tenants. 

On another note, if you're still living in your home as a primary residence, an LLC may not be the best way to go.

Disclaimer: I am an attorney, but I am not your attorney. This is not legal advice, just friendly information.

As a general rule, real estate holding LLCs should be created in the same state as the property. While some states have better protections for LLCs than others, when it comes to real estate courts only want to recognize local protections. You can always create an out-of-state company to own that LLC.

Since LLCs are pass-through entities, you won't find tax advantages in one jurisdiction over another, other than maybe the annual fee.

Disclaimer: I am an attorney, but I am not your attorney. This is not legal advice, just friendly information.

It may be helpful to explain why you want to pay yourself a salary. Schedule E income is typically passive income and not subject to self-employment taxes. However, if the rental activity is considered a business activity, and the owner materially participates in the business, the income may be subject to self-employment tax. So, there may be significantly higher taxes. It's definitely worth talking with a CPA about this before you make any changes.

Disclaimer: I am an attorney, but I am not your attorney. This is not legal advice, just friendly information.

Realistically, if you're trying to set up multiple LLCs across jurisdictions, with an asset protection focus, it's best to get an attorney involved. If you have a solid plan, and want to file without an attorney, maybe incorporate.com or something similar. That will get them registered, but I wouldn't count on legal docs from any DIY source. As for software, my rentals are managed with apartments.com. I especially like that rents are on auto-draw each month.