Newbie with a LLC Question

General Real Estate Investing
1

Hi all. New guy here from Texas (from Louisiana though) with a question on LLC formation tactics. So here’s the rundown. Me and two lifelong friends and business partners (yes we have been down this road) are looking to all invest in our first rental/ vacation property, a fishing camp in Louisiana. So my question is this…

If I am trying to maximize tax benefits and protection should I…

  1. Should we all form LLCs individually and then buy the camp in the 3 LLC names or
  2. do the above and form another LLC for the camp itself and buy it with the 3 LLCs or
  3. simply do one LLC on the camp and then the 3 of us buy it as individuals?

I am sure this is a silly question, but I am spanking new to this and want to ensure I start off on the right foot.

My concern on option 2 is what if I am writing off far more than my partners, because they have no income they are trying to reduce? and concern with number 3 is will we have to split the deductions equally if there is only one LLC?

Please let me know if I am blatantly missing something and thanks again for any help. Looking forward to learning from the best.

2

Hi,

Create one (1) Louisiana LLC. An LLC is a flow through tax entity so even if you only own 1% you could allocate yourself upwards of 98% of the tax benefits. Owning the property 33, 33 and 34% still allows you and your partners to give you 70% of the write offs if all agree. Income can be allocated different from ownership also!

If your requiring financing to get this property everyone will have to sign outside of the LLC as personal guarantors so their is no benefit of trying to start 3 LLC’s and for management purposes you want the property owned by a single entity.

Is this fishing camp going to employ employees? Is one or more of the principle owners going to be employed by the fish camp? If so you may want to talk with an attorney or tax advisor as there are reasons to create an S-Corp rather than LLC in some circumstances.

Good luck,

             GR
3

Thanks for the response. So couple answers and questions…

is the 70% of write offs a rule? or an arbitrary number for example? anywhere to look to verify?

The property will actually likely be owner financed.

As far as employees, may have a caretaker that lives for free but manages property, cleans, cooks, etc. Any clever ideas I could do here as far as tax benefits? should we have an employer agreement, etc?

keep the thoughts coming! thanks!

4

Hi,

Each owner of an LLC must receive at least 1% of flow through profits and write offs, so this means if every partner agrees that theoretically a single partner could receive any amount from 1% to 98%, this includes 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14, 15, 16, 17, 18, 19, 20, 21, 22, 23, 24, 25, 26, 27, 28, 29, 30, 31, 32, 33, 34, 35, 36, 37, 38, 39, 40, 41, 42, 43, 44, 45, 46, 47, 48, 49, 50, 51, 52, 53, 54, 55, 56, 57, 58, 59, 60, 61, 62, 63, 64, 65, 66, 67, 68, 69, 70, 71, 72, 73, 74, 75, 76, 77, 78, 79, 80, 81, 82, 83, 84, 85, 86, 87, 88, 89, 90, 91, 92, 93, 94, 95, 96 or 97!

As partners you could allocate 1% to partner A and 50% to partner B and 49% to partner C even though each partner owns 33.33, 33.33 and 33.33% respectfully. The allocation can actually change year to year!

I have C corps who are my LLC partner, even though I only own 1% and my C corps own 99%, I can actually take up to 99% of profits and 99% of write offs even though I only own 1% and only have 1% maximum of the liability if litigation ever arises!

Now if the current owner finances and requires each of you to be guarantors and sign yourself promising to pay you will have zero corporate protections and the only benefit of vesting title in an LLC is if someone visits and got hurt or protections from any other outside liability.

Yes, any way you cut it you want an agreement with your caretaker, but not necessarily as an employer / employee agreement as you could be liable for workers comp, employer contributions for social security and unemployment insurance and may obligate yourself to pay a minimum wage.

Probable better is a exchange of services for a place to live with your care taker, talk to an attorney for advice in your state!

Look to verify on a place called “Google” great place to learn! Enter “My State” LLC Laws and Rules?

Actually LLC rules will be under Federal Tax code also!

                      GR
5

Good info and great advice on the caretaker piece.

So what “corporate protections” would I be foregoing by owner financing? I think the liability issue is all we are concerned about. Can you clarify?

6

Hi,

If the property owner requires each of you to sign as individuals to buy the property owner financed then you have no protections of your guarantor of the debt.

Actually 99.99% of all loans require the personal signature of the borrowers rather than a corporate entity.

             GR