business structure

General Real Estate Investing
1

The following idea came from a poster (accountant in Tx.) several years back (Read: I am not smart enough to figure this one out!!).
Our current business structure is an S Corp.
We will place our current 3 properties into an LLC and starting w/ the 4th thru 6th property placing those into another LLC, 7th - 9th into another one, etc.
We want the S Corp to run the LLCs. How do we go about setting up this type of business structure?
Any advice &/or direction would be much appreciated.
Thanks,
dlb
.

2

It is my understanding that you can make the S-Corp the manager of the LLCs. I am not clear on the benefits of doing this but I’m sure you could set it up that way.

3

why would you want to do this?

4

I suspect the motivation is to limit asset exposure within each LLC. Where do people get these ideas, is it reading the guru material? Way too complicated for the benefit.

5

If you think about it, if you do make the manager of the LLC the S Corp then

  1. all mgt decisions concerning the assets of the LLC are under control of the officers of the corporation
  2. liability is limited to those assets under control of the LLC
  3. the owners of the LLC are protected by one more layer of abstraction, that of the S Corp
  4. I may be wrong on this one as I don’t have a complete understanding of the implications but … gains and loses would pass thru to the corp, gains could be held in reserve in the corp and not taxed at the individual level. The gains could then be distributed to the officers of the S Corp as dividends and certain taxes would not have to be paid.

Like I said, I may be wrong. If you know differently please respond.
dlb
.

6

Let me preface my response…I am not a tax professional. If you make the manager of the LLC the S-Corp doesn’t that by definition make the S-Corp a member and/or owner of the LLC? If so can S-Corp’s legally own another entity? Why not just setup a straight LLC? I don’t see where the S-Corp offers any further abstraction since both entities are public record. As for taxes; just file the paperwork to have your LLC taxed as an S-Corp. Those are just my thoughts, I’m sure the tax pros on the forum will chime in.

7

I do want the S Corp to own and manage the LLC. Can the S Corp legally own another entity? I will check w/ the state govt today. I don’t want to disolve the S Corp - I want to provide another level of protection w/ this type of structure. I too hope that a more knowledgeable person than myself will respond and point me in the right direction. Thanks for the info.

8

I’m glad I found this forum because I am in a similar predicament as you. If you figure out the optimal way to do this before me, I would appreciate your knowledge. I want to speak with another attorney to get another opinion.

I have created an S-corp in Nevada which I plan on using as my main flow-through entity. The properties I purchase which will consist mostly of pre-construction and pre-development real estate which would each be placed under LLC’s. Currently, the S-corp owns 99% of each LLC and I own 1%. I am not sure if I should have the S-Corp own 100% of each LLC for tax return filing purposes or even if I should have an S-corp as the master flow through entity. I plan on holding each property for about 2-3 years until selling. Properties purchased would be located throughout the nation. Prior to selling, the property would be quitclaimed over to the S-Corp, since there are no state income taxes in Nevada.

An attorney had recommended that I have a Master LLC as the flow through entity, and have that own 100% of each LLC which should be single member owned, so that I would not be paying for multiple tax returns for each partnership between each LLC and myself.(I’m starting to think that the company who set this up for me did it this way in order to get me to pay for more tax return filings) He also mentioned that I would be losing some basis in the property for tax loss purposes. I’m not sure what that means. I understand that LLC’s don’t have to pay state income taxes. This also holds true for the S-corp in Nevada. The attorney recommended that I establish the Master LLC in my home state of Louisiana and leave the Nevada corp. alone. This guy is located in Michigan. I just wanted to get another opinion before giving up all of the time and money I have invested in the Nevada Corp.

9

" I want to speak with another attorney to get another opinion."
When you do get his opinion, please pass it on. Thanks.
“An attorney had recommended that I have a Master LLC as the flow through entity, …”
Well, being a novice at this, I figured that if the S Corp is the master and the LLC is the slave then the pass thru stops at the corporate level. From there you then can decide what to do w/ the income. The bottom line is that you will have to pay taxes whether the distribution comes from an S Corp or an LLC.
We already have an S Corp and do not want to disolve it. We just want something to manage our LLCs.
A call this a.m. to the Secretary of State’s office answered the question, “Can an S Corp be the manager of an LLC?” This state does not monitor what an S Corp owns.
If you gain any further insight into this issue please pass it along as I am sure that many others would love to know how to resolve it.
Thanks,
dlb
.

10

As I understand it, an LLC can be either member-managed or manager-managed. If member-managed, then by default, the manager is a member of the LLC. If manager-managed, then by default, the manager is not a member of the LLC.

Income does not flow through the LLC to the manager, it flows through to the LLC member(s). Only if the LLCs sole member is an S-corp, then the LLC income would flow through the S-corp to the S-corp owner(s). In a manager-managed LLC, the LLC net income would still flow through to the LLC member(s).

Just my understanding, though, it could be flawed.

11

“I just wanted to get another opinion before giving up all of the time and money I have invested in the Nevada Corp.”

While reading, “Own Your Own Corporation” by Garrett Sutton (part of the Rich Dad series) he states,
“Keep the operating entities - the ones that deal w/ the public- away from the asset-owning entities” (pg. 77).

I guess that this furthers my position on the corp running the llc.
Thanks,
dlb
.

12

" Only if the LLCs sole member is an S-corp, then the LLC income would flow through the S-corp to the S-corp owners." I believe that this is our objective. THanks for the clarification on member vs. mgr and flow through.
Thanks,
dlb
.

13

Lets say you get sued personally wouldnt creditors be able to reach your shares in your s-corp and be able to take control of all of the LLC’s that the s-corp controls?

14

That is a great question but I don’t know the answer. Maybe another poster has one & would like to share it. Even if I only had an LLC and got sued, would the same apply?
Thanks,
dlb
.

15

I’ve been told most real estate is bad to HOLD in a corporation of any type [LLCs are fine, as long as they are pass through entities…aka with the ‘check the box’ option you elected to file with the IRS as a sole prop. or as a partnership, not as a corporation]. Why? You lose some of the good deduction options, plus you can’t transfer the assets into your own name, heirs [assuming your using the LP / gift % option] or another entity’s name without being subject to big tax expenses [in most circumstances]

16

I don’t want the corp to hold properties directly. I want the corp to manage/run the LLC’s. The properties will be held by the LLC. Once I gather enough info on this subject a decision will be made concerning the business structure. I have found this site to be very helpful in the past and I still feel that way. The posts in responce to my initial question have been very thought provoking and much appreciated.
Thanks,
dlb
.

17

Gotcha. Just make sure the corp has no equity in - aka is not the owner of - the LLCs, and you’ll be fine.

18

corporate stocks are an investment, even if they are shares of wagner, inc. as such they are available to satisfy judgement creditors. so when you rear-end the lady in the pinto, she sues and wins, she can be awarded your stock “investments” and now owns the company that owns all the LLC’s. you lose.

LLC membership is considered personal property by statute. as such it is not available to satisfy judgement creditors. now she can sue and win, but cannot gain control of the LLC. this is a BIG difference.

Both the corporation and LLC protect you from liabilities arising inside the entity, but only the LLC protects the company from your personal liabilities.

thus, having the S-corp own the LLCs is dangerous.

You can still choose whatever tax strategy you desire for your LLC including: C-corp, S-corp, partnership or sole proprietor (disregarded), allowing you the superior protection of the LLC with the tax strategy you desire.

Dave made an excellent distinction between Member and Manager.

The concept of a corp as manager is: If the manager is negligient (doesn’t repair that loose board) the manager will be sued rather than the property owner. Vesting management in a seperate entity is intended to provide some additional protection for the LLC (the manager was negligent, not the property owner). However, this strategy will FAIL if you are the single individual who owns and operates both entities. You will be personally sued. Contrast this to contracting with a professional management co - they would take the heat for negligence and you can reasonably claim that you (the owner) are not involved and/or liable.

Vesting management in an S-corp is no more complicated than modifying your management agreement (you DO have one, don’t you?) between the LLC and manager, which specifies who the manager is, rights, duties, etc.

When dealing with multiple properties and/or LLCs, having management vested in a single entity does simplify management tasks (one checkbook, for example), but don’t look to it for “lawsuit protection.”

19

Thanks for the reply. This is what I was needing to fill in the gaps in my knowledge. I do appreciate your time and insight.
dlb
.

20

mcwagner,

Aren’t assets held in a retirement fund like an IRA afforded an extra level of protection? I thought those were generally protecting against lawsuits. Maybe you can clarify on that. I know OJ got to keep his NFL pension after the wrongful death suit.