By Michael J. “Mick” McGirr, Esq., Phocus Law
I did not make the title of this article a line from The Offspring just for fun. It is also sound advice for investors.
The question I get asked more than ANY other question from real estate investors is some iteration of, “Am I okay putting all of my properties in one LLC?” It is not an exaggeration to say that I get asked this several times per week but even several times a day in some instances. Let me explain further, while keeping this article short and sweet…well maybe I should have it printed on the back of my business card!
First, one of the main reasons for conducting business using an LLC is to protect your personal assets from any liability that might come from your business activities. LLC stands for ‘Limited Liability Company.’ Simply put, an LLC, when utilized properly, creates a shield between your risky business (even if it does not seem risky) and everything you have worked so hard to acquire. Some key steps to utilizing an LLC properly are: 1) not commingling personal funds with business funds; 2) carrying out your business activities through the LLC, not through your personal name; and 3) not doing anything really bad (fraud, drunk driving while on business time, etc.). As long as you follow those steps, the risk of any liability bleeding over to your personal life is nearly extinguished.
So, we understand the ‘vertical’ concept – an LLC protects your personal assets from business liability. But, what about protecting one business asset from the liability created by another business asset? LLCs can protect you there, as well. What follows is a quick illustration of how properly separating your assets can help you preserve your accumulated wealth.
HYPOTHETICAL: You have three rental properties, each with 60% equity, and you are also working on a fix-and-flip property. A passerby is injured on the fix-and-flip property, and the injury exceeds your insurance limits or is not covered for some reason. The passerby sues for the injury suffered. IF you have one LLC and have been running all your investments out of that LLC directly, the injured passerby would be able to access the equity in your rental properties to be compensated for the injury. However, if each of the rental properties is in its own LLC, and the fix-and-flip was also in its own LLC, when suing, the injured passerby would only be able to access the equity, cash, or other assets in the fix-and-flip LLC to be compensated for the injury. In that second scenario, the equity in each of the rentals is protected because the injured passerby can only attack what is in the fix-and-flip LLC.
The protection provided by having your investments in separate LLCs can be massive. Early on in your investing career, you may not have much equity to lose. But, as you progress, preserving the wealth you have worked so hard to accumulate will become more and more meaningful. Therefore, it is wise to develop good habits early in your investing and business cycle. Proper separation of investments into separate entities is one of those good habits.
You may be concerned that those separate entities will create complications in your books or tax strategy. As most of these ‘asset’ entities will be pass-through entities, the burden on your tax preparation will be very limited. Also, you will find that keeping a simple QuickBooks or Excel record of each entity will often make it easier to determine which properties are providing better value, as opposed to having all your properties in one spreadsheet, where such valuable information can be lost.
Overall, I love assisting clients with structuring their investments. Helping you keep your hard-earned wealth is rewarding. If you have questions on how to structure your investments, please do not hesitate to reach out to me. I can be reached by email at Mick@PhocusCompanies.com or by phone at 602-457-2191.