How to use an LLC for every property purchase entails understanding LLC’s.
Defining an LLC
According to Investopedia:
In other words, it looks like a corporation freeing its members/shareholders (owners) from personal liability for the LLC’s debts and liabilities.
Benefits of Using an LLC for Every Property Purchase
Note: The following information does not intend to give you any legal advice. Please contact an attorney about your specific legal situations.
Several benefits occur with using a separate LLC for every property purchase. These include:
1. Asset Protection: If an injury occurs on the property only the LLC as the owner becomes liable. You own the LLC, but not the property. This shelters you (and the other LLC’s) from any liability stemming from the property unless you personally did something to cause the injury. For example, you drove your car to the property striking a pedestrian while pulling into the driveway.
2. Multiple Ownership Structure: If you work with different partners for different properties using separate LLCs for each property makes sense. It defines the ownership percentage of each owner for every property simpler.
3. Buying in the Different States: Incorporate an LLC in each state where you purchase properties.
4. Flipping Properties: Some investors create a new LLC for every flip. It separates the flip from other properties with respect to liabilities and taxes.
How to Form an LLC in California
1. Select a name for your LLC;
2. File Articles of Organization (Form LLC-1) with the California Secretary of State;
3. Select a Registered Agent for the LLC;
4. Within 90 days from filing the Articles of Organization, file a Statement of Information (Form LLC-12); and
5. Pay your $800 state tax to the California Franchise Tax Board every year.
Understand Piercing the Corporate Veil
Corporations and other legal entities become burdensome. They require separate accounts, separate emails, separate addresses, etc. Too often, people get confused or lazy and forget to keep all business separate from personal matters.
You must separate your legal entities from your personal life. Otherwise, if someone sues you’re LLC and finds out that you comingled your personal funds and accounts with the LLC, or even sent out personal letters using your LLC letterhead or email address, the plaintiff uses this to strip you of your lawsuit protection.
Piercing the corporate veil means that the shareholders of a corporation become personally liable for the wrongful or negligent acts of the corporation. It also applies to an LLC. All your efforts to insulate yourself from your corporations and LLC’s so you can’t be sued for their actions fall apart when the corporate veil gets pierced.
Your personal assets become subject to seizure if you lose the civil lawsuit. Otherwise, with no corporate veil piercing, only your equity in your LLC becomes lost if the LLC loses in court.
Several Types of LLC Exist
For tax purposes, every LLC acts as a partnership. This means all income passes through the LLC directly to each owner based on their ownership percentage.
Every type of LLC has its own tax obligations. Consider the tax implications of every LLC before creating it and purchasing properties. The four most common for tax purposes include:
1. Single Member LLC: Only one member creates the LLC. The income carries through the LLC to the individual owner. The LLC reports all profits and losses from each real property on Schedule E of your income tax return.
2. Married Couple LLC: The only members are a married couple. The profits and losses pass through to the married couple. However, an LLC formed in a community property state (like California) requires the filing of a Partnership Tax Return for the LLC. Currently, the community property states consist of:
- New Mexico;
- Washington; and
3. Multi-Member LLC: An LLC with at least two unmarried members becomes a multi-member LLC. The pass-through tax treatment also applies to this type of LLC. Each member declares his or her share of the LLC profits and losses on their tax return.
Bonus: An added benefit for multi-member LLC is the difficulty to “pierce the corporate veil” in court. One member or a spouse owned LLC can end up looking like their “alto ego” while a multi-member LLC doesn’t.
4. Series LLC: A Series LLC starts with one LLC and then branches out into another or others. Like a family tree structure. The head LLC acts as a parent to its children LLCs. You can create as many “series” LLC’s as you wish.
The series LLC’s operating directly under the parent LLC. But, each LLC operates with separate liability from the others. Like owning several LLC’s where each one owns real property.
Look at the parent LLC as the “Mommy” or “Daddy” over the other children LLC’s.
Franchise Tax – California makes each series LLC pay the $800 franchise tax. However, paying $800 for every LLC may be worth it especially for their asset protection benefits.
Advantages of the Series LLC
A traditional LLC has limits. While a series LLC offers more advantages. Let’s explore the difference between the two.
Owning More than One Property: The series LLC allows you to own as many properties as you want by creating a “child” LLC for each one. If your long term investment goals raise the possibility of owning more than one property, establish the series LLC model now.
Investment Growth: Once you create your first LLC forming a new child LLC becomes simple. You can do it from your computer. It’s a simple private document signed and stored in a secure place.
Compartmentalization for Better Asset Protection: The problem with one LLC owning all your investment properties arises under the “not putting all your eggs in one basket” strategy. Isolating each asset in its own series protects it from lawsuits against you personally and the other LLC’s. You as an individual become “Judgement Proof” which civil lawsuit lawyers hate. Suing a judgment-proof defendant amounts to a waste of time and money.
Easier Anonymity: Viable asset protection plans call for complete anonymity. The true owners of real properties and LLC’s remain anonymous. Lawsuits never get filed against anonymous defendants.
How to use an LLC for every property purchase creates many advantages and benefits.
As you read, creating an LLC takes 5 steps in California. The benefits of using separate LLC’s to own real properties include:
- Asset Protection;
- Multiple Ownership Structure;
- Buying in the Different States; and
- Flipping Properties.
Several types of LLC’s exist including:
- Single Member LLC;
- Married Couple LLC;
- Multi-Members LLC; and
- Series LLC.
The advantages of using series LLC’s to own different properties include:
- Owning More than One Property;
- Investment Growth;
- Compartmentalization for Better Asset Protection; and
- Easier Anonymity.
Beware, owning several rental properties entails more time and money to maintain and find good tenants.
Contact Us to see how much time you save and the ways our property management services and record-keeping saves you money too.
Steven Rich, MBA – Guest Blogger
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