So, you are getting bigger in your real estate investing. Maybe you hold all of your property in your own name. If you are trying to decide if an LLC is right for you or not, check out this post first. If you have decided to use an LLC, or if you already do, but are wondering if that LLC should own the next property, this is the post for you.
Investors commonly ask the question of whether they should put each property into an LLC, thereby having as many LLCs as they have properties. The first thing they should be asking is:
What Are My Goals for Starting an LLC?
The LLC should be set up to help you limit the liability that you have. They will not shield you from all liability. Think of them like containers that hold assets and if there are losses, can help prevent them from spilling over into other investment assets or your personal assets. Other LLC benefits are outlined in the link above.
Goal #1: Ease of bookkeeping. Unfortunately, LLCs make accounting more difficult because you have to do the work for the LLC as well as your personal. Even with the pass-through taxing, it’s more work. Even if you are a sole-proprietorship disregarded entity in the eyes of the IRS, you’ll still have the bookkeeping for the company. If you are concerned about keeping track of the funds only, you could (and should anyway) start a bank account for the business. Don’t forget that each LLC has to have its own articles of incorporation and operating agreement and must be maintained yearly with the state government.
Goal #2: Look legitimate. This one isn’t really that great. You can do business as XYZ Apartments anyway. The only thing would be that without a corporation the checks must be made out into your name and maybe you think that looks small time to your tenants and vendors.
Goal #3: Privacy. Some people want the LLC because they think it will keep their name off the books and they will be harder for lawyers to find. This is not the case, even if you have an attorney be your LLC’s registered agent, a lawsuit will reveal the owners.
Goal #3: Limit your liability. This is the reason most people want an LLC, but they misunderstand how beneficial the LLC can really be. True, they help, but you can get that shield with less headache by getting good insurance plus an umbrella policy. Also, if you are grossly negligent or unlawful in how you run your rentals, you can still be personally sued. It’s better to focus your time on running your properties right first.
It’s in the Balance
The key is to balance the bookkeeping headaches and LLC fees with the liability benefits. One LLC per rental property is too many. A typical umbrella policy is $1,000,000. The assets in the LLC that policy covers should be no more than what is covered in the policy.
Therefore, you should have total value of assets in an LLC of no more than $1 million. You might have smaller properties. For this reason, I also recommend having no more than 10 parcels in an LLC. By that I mean the municipality’s division of properties down to the property level. There might be one or more buildings on a parcel.
Limit your LLC’s ownership to 10 parcels or $1 million. Once you reach this amount, start a new LLC. Finally, if you change the structure of ownership for the next purchase in any way, it necessitates a new LLC because the operating agreement will be different.
Get used to setting up these LLCs and you will have boilerplate documents that you can take to your attorney to help file. This will save you money. Be happy that you are a big enough investor that you need to file the next one. You are fantastic!