One major problem with owning rental real estate is liability. People can sue you for any reason — or none at all. If you hold title to your real estate personally you could lose everything. That’s why many real estate investors create limited liability companies (LLCs) to hold title to each of their properties. At worst, they might lose one property in a lawsuit but likely not all of them.
However, it’s not cheap to create and maintain an LLC. You can form one yourself, but you’d better know what you’re doing. If you miss something and are sued, the other side may be able to have the LLC thrown out and attack your personal assets.
Then there’s the considerable workload and expense of filing taxes for each LLC, a multi-step process. If the LLC has only one member it is considered a “disregarded entity” and the member files a Schedule C with a personal federal income tax return. If the LLC has two or more members it must file Form 1065 and a Schedule K-1 for each member with the IRS. In turn, each member must file an individual Form 1040. The LLC might be required to file and pay other taxes as well such as unemployment tax, property tax and state taxes. (An LLC also has the option of filing as a C Corporation.)
Because of the hassle and cost to create and administer many LLCs, some investors put two or more properties into the same LLC. They know they are taking a risk by exposing more than one property to litigation, but they reluctantly decide it’s worth it to avoid the headaches of having numerous LLCs.
Instead of creating LLCs for each property, consider a relatively new vehicle called a Series LLC, a.k.a. SLLC.
An SLLC is an LLC that can hold any number of properties or business entities in separate sub-units called “series.” Each series is designed to be protected from liabilities arising from the other properties or entities in the SLLC. It’s like having an LLC for each property but only incurring the cost and administration of one.
Each series (one property or business entity) is treated separately. Each has its own assets and liabilities, each can incur debt, be sold, exchanged, etc. In general, creditors of one series may only make claims against the assets of that series.
As with a traditional LLC, the owners (members) of each series are not financially responsible for the series’ debts and obligations.
Our Texas SLLC pays one annual state fee and files one federal income tax return, even though it holds multiple properties.
Not every state allows you to form an SLLC. However, you can create one in, for example, Delaware, and it is my understanding that it can register in any other state. For example, California law does not permit an SLLC to be formed. But the California Franchise Board website (https://www.ftb.ca.gov/businesses/bus_structures/S…) states:
“A Series LLC that is formed under the laws of another state may register with the California Secretary of State and transact business in California.”
To find out your state’s laws, google “series LLC (your state).”
ADMINISTRATING A SERIES LLC
Each series should have its own bank account. All contracts, deeds, notes, etc. should be signed in the name of the series (i.e., “High Profit LLC, Blackacre Series only”).
Document loans between series.
Transactions between series should be priced at fair market values with appraisals.
Each series’ assets and and liabilities must be kept separate from the other series.
Each asset should be owned solely by one series. In other words, two or more series should not be co-owners of the same property or business entity.
This is not legal or tax advice. Consult with your attorney before you form an SLLC.