I’m new to the site and hoping to learn a lot. My wife and I started an LLC about 9 months ago to purchase our first rental property. We bought a single building with 6 one bedroom apartments. The building is now completely full and things are going well. I’ve looked at numerous book stores and searched online for a book related to owning multiple properties and operating as an LLC. I would like to know about the paperwork side of operating the LLC. My wife and I are equal partners with no employees. When we make deposits from our personal funds to our business checking account, what kind of documentation (if any) do we need to fill out? Is there anything special (forms, documents, etc.) about us pulling money out of our business account for personal use (paying personal debt)? So far we have used all of our rent money for operating expenses or improvements, but I wanted to make sure we do everything the right way. Any help, advice, or links are greatly appreciated. Thanks.
You’ll need resolutions and minutes to document decisions.
What have you done to protect yourself from your own personal liability regarding the rentals?
So is there a form for the resolutions or can I just draft up something that fits my needs? Do I need a resolution every time I deposit any amount of money into our business acct.? And the same for withdrawals? Regarding personal liability… That was the deciding factor in establishing the LLC. We didn’t want to open ourselves up to people suing us for our retirement funds and things such as that. We set up the LLC prior to purchasing the property and all the paperwork was written in the business name…nothing was ever in our personal names and then transferred. We are careful to operate out of our business account for the property to avoid the “alter ego” argument. Luckily our business is set up in the state of Illinois which is one of the few states to allow series LLCs. We paid a little extra to be authorized to establish a series and each new property will be in a separate series under the blanket of our business. The waters haven’t been tested much for the series LLCs yet, but it’s supposed to limit your liability to only that which is contained in the series. In addition, our leases (which we took many of the items on the lease from a Realtor who has been leasing property as well for about 35 years) have a paragraph about holding us harmless and not being liable for damage or injury to the tenant or their guests. I don’t know how well that would stand up in court, but I feel we do a good job of taking care of the tenants. We just started doing this 9 months ago and one of the tenants had nothing but praise for us and said we were the best and most caring landlords she had ever seen.
You don’t need a resolution to make deposits or pay bills. The operating agreement should authorize the managers to handle the day to day operations without member involvement. Resolutions are used for major actions like opening a bank account or buying property and those meetings should be documented with formal minutes.
It sounds like you did everything correctly, except for one thing: you manage the property yourself. All the LLCs and planing you can imagine won’t protect you from yourself. Managing the rental property creates a means around each series straight to all your personal assets, which includes all LLC assets if it is single member or husband/wife. If you want to manage the LLC, you can’t own the member interests yourself.
Hopefully, your release will never get tested. Such language is usually against public policy by statue and doesn’t apply to guests who are not a party to your rental agreement. Generally speaking, people can’t sign away legal rights.
I think you are going to be fine the way you are going. You are further along than most people. Just be wary of the limitations of your set up.
Can you explain what you mean by “If you want to manage the LLC, you can’t own the member interests yourself.”? Who else but the owners would manage the LLC (unless a very large or million dollar company)?
It means the manager and member are not the same person or entity. When you manage an LLC where you are a member, you create a way around the LLC to your personal assets. It also harms the charging order protection of the LLC.
They are called manager-managed LLCs and the LLC member can be the owner’s trust, another entity owned by the owner, a trust set up for the benefit of the owner’s family, a holding company, the owner’s family who take no part in the business, or business partners who take no active role in the business. None of these options require a very large or million dollar company.
It sounds like what you are saying is that if an investor is going to manage the llc and/or manage the investment property that there is no liability protection. I should own the property in my own name. Is this your conclusion? Would it make any difference if I was investing/managing through another entity such as a land trust or s-corp? I’ve read that single member land trusts can be pierced pretty easily. Do you agree?
Let’s say it is severely limited, but for most people the benefits will not outweigh the costs and they are better off owning in their own name. However, there are ways to provide liability protection and manage property. That type of planning goes beyond the typical stuff you find from the gurus and really doesn’t make sense for most people. It can get expensive and really doesn’t do much anyway since the majority of the wealth is in the RE business, a situation which requires a totally different approach. You are ready for that type of planning when you have the excess cash to pay for the qualified professional to set it up. You face a bigger threat from taxes than a plaintiff’s attorney and that is where I think people should focus their energy and money.
Yes, but again, you need a qualified professional to determine the best set up for your situation. Planning is not a cookie cutter activity. Each plan is as unique as the individual who needs it.
I never heard of a single member land trust. Land trusts are typically grantor trusts and offer no asset protection at all. They are estate planning tools and offer a small degree of privacy. If you mean a land trust owned by a single member LLC, the trouble begins when the single member manages the property. I so use a land trust/SMLLC combination, but my single member is another entity like a limited partnership or limited liability limited partnership. IN every case, the owner of the property and the manager of the property are never the same.
There was a good advise from Attorney William Bronchick, I think it would be a good idea for you to purchase his program which is only $900.00 something for the whole program to protect you from any litigation. If you are thinking of purchasing rental properties, he said you are better off with an LLC, and corporation if you purchase wholesale.
With all the talk of asset protection, whey hasn’t anyone here mentioned a simple umbrella insurance policy. Not sexy I know, but seems many investors surround themselves with legal entities they don’t really understand hoping for protection they really can’t expect.
I bet the $900 you’d pay Bill Bronchick for legal entity advice that only a lawyer could explain, would buy a boatload of instant asset protection from an insurance company.
Well said, Equity.
I’ve been following your advice on this topic via several threads and really appreciate your input. I have another follow up question (which I think I already know the answer to).
Compared to owning and actively managing your own properties in an LLC, is there any greater liability protection owning the properties in one LLC (of which you are a member) and having another LLC (of which you’re also a member) manage the property? Does this create another layer of protection, or would any lawsuit/potential judgment still be able to go after your personal assets b/c it’s the same member in both LLCs (owner and manager)?
Would that second “management” LLC be subject to all the rules of any management company that manages others’ properties?
The owner/manger combo doesn’t really work. The real issue is personal liability. If you are the one who caused the injury related to the property, you are personally responsible. The LLC that owns the property is responsible as the property owner. The LLC that manages the property is responsible because you are its agent. All assets of both LLCs in excess of insurance go to the creditor along with all your personal assets, including shares in c-corps. If you have membership interests in other LLCs or LPs, then the creditor may be limited to a charging order (that depends on how well the LLC operating agreement is drafted). That may force a settlement on your terms, but you won’t be able to take any money out of your other investments and that may force you to settle on the creditor’s terms.
You need a break in the ownership chain. Let’s say you manage all your investments through a limited partnership as a holding company that does nothing that would generate liability and 99% is owned by a trust for the benefit of your children as the limited partner. You own 1% as a general partner. Taking the same situation as before sans the management LLC, you are still personally responsible and the ownership LLC is still in danger, but now all the other investments are safe. The creditor will only get a charging order on your 1% interest. That 1% can be saved by selling the distribution rights to the trust in exchange for a deferred annuity that will start paying in 20 years. Now, only the property is at risk and that can be protected by stripping the equity through mortgages and HELOCs. Multiple angles of attack required multiple layers of protection.
Personally, I like to work c-corps into the mix because of the employee benefit programs. Retirement programs generate a tax deduction of tens of thousands of dollars each year with full immunity to creditor assaults. They can provide health insurance that has no deductibles or copays and covers OTC items and experimental procedures. All pays are 100% tax deductible. You can take out money tax free via employee benefits and the corporation gets a tax deduction. The possibilities are almost limitless and much more effective than the crap gurus push.
If the annuity will not pay for another 20 years and most of the profits are going into the family trust, do you get any cash from this property? Do you use other investment vehicles to supply short term cash flow to pay your bills, put food on the table?
Once the interest is sold, the general partner cannot receive any cash.
In the plan above, I would use a c-corp to provide a salary to pay personal expenses. It’s true that employment taxes are due on this income, but those taxes make an individual eligible for government benefits. The corp provides ERISA-qualified retirement benefits that are immune to creditor attack. There is also equity indexed life insurance and annuities, which have statutory protection from creditors.