How do I capitalize an LLC? - Posted by Ron (MD)

Posted by Terry (Houston) on January 08, 2002 at 24:39:58:

Thanks David

Terry

How do I capitalize an LLC? - Posted by Ron (MD)

Posted by Ron (MD) on January 05, 2002 at 11:56:55:

I’m getting ready to buy a rental, which I’m going to hold in a single-member LLC. (I plan to accumulate a handful of properties in each SM LLC. My wife and I will have one multi-member LLC that will own all of the SM LLCs.)

Both the SM LLC and MM LLC are brand new.

I want to fund the purchase of the rental using my own cash. (I may re-fi later.) The question is, how exactly do I get the cash from me (personally) to the SM LLC? Do I have to open bank accounts for each LLC and the loan money to the MM LLC which, in turn, loans money to the SM LLC?

I’d rather not have any more checking accounts than I need to.

(I don’t know if it’s relevant here, but I plan to create a c corp to manage this, and other, properties.)

Thanks.

Ron Guy

Re: How do I capitalize an LLC? - Posted by Dan_NC

Posted by Dan_NC on January 22, 2002 at 21:23:54:

Ron,
I am planning an entity structure similar to the one you describe. I’m not clear about the purpose of the MM LLC. Would you elaborate? And am I correct in thinking the one member of the SM LLC’s is the MM LLC?
Thanks in advance,
Dan

Re: How do I capitalize an LLC? - Posted by JHyre in Ohio

Posted by JHyre in Ohio on January 06, 2002 at 05:49:30:

Frank’s post is dead-on…I like C-corps to be “captives” doing work for the bread and butter portion of the business, be it managing, repairing, selling, etc. That allows the income going into the C t o be controlled, thereby avoiding the issue of the C making “too much” and getting into high bracket or 2x tax issues. Most people hold more than one property per LLC, unless large properties are involved. This is because of transaction costs for having too many entities…such as bank fees. I would have a separate account per LLC to demonstrate substantive “separateness” from the parent entity…and fund the entity via that account. Sounds to me like you’re on the right track…but keep the bank accounts separate…the money can always flow up to the mother ship on a monthly/quarterly basis.

John Hyre

A few Thoughts - Posted by Frank Chin

Posted by Frank Chin on January 06, 2002 at 05:26:01:

Hi Ron:

I just formed a “C Corp” to manage my properties, and thinking of an LLC to hold my properties next, opposite of what you’re doing. Reason for LLC is the equity in each of the properties is a getting little too high for comfort.

My plan was to have tenants pay rent to the LLC, the income would then for tax purposes flow to me. The plan is to have the LLC pay the “C Corp” a management fee. This will be limited to amounts large enough to cover my medical expenses, and maybe other fringes at this point.

I recall an earlier post of yours mentioning a problem of having to convert to “S Corp” due to high income in the “C Corp”. So if you start your rentals flowing payments through the LLC, and limiting what goes to the “C Corp”, you’ll control the problem for the start.

Obviously, you’ll need a checking account for the LLC if you plan to flow the rents through it.

I haven’t thought of “disability insurance” angle which I now pay personally, and you asked in the other post. I’ll be interested in John’s answer to that as well.

As far as not setting up a bank account for the LLC, aren’t you going to have small expenses for these entities from time to time? I know in the larger companies, there can be corporate entities used to make payroll or health benefit payments, and then expensed back to other entities through intercompany entries. But it requires the setup of intercompany clearing accounts plus a cumnbersome intercompany accounting system.

So wouldn’t a separate checking accounts be most efficient for small guys like us?

Frank Chin

Re: How do I capitalize an LLC? - Posted by Ron (MD)

Posted by Ron (MD) on January 23, 2002 at 05:29:28:

Dan,

First, I’m not an expert in this area, but I’ll explain it as I understand it.

My wife and I want to share ownership of two basic businesses: rental and flip (i.e., rehab). We establish an LLC for the rental and an S corp for the flip. The LLC must, of course, be multi-member because there are two of us.

These two entities are, essentially, our operating companies. We want to separate our assets for asset protection purposes…if we have legal problem with one property, we don’t want it to affect all properties. To do that, we establish a second tier of LLCs to be the direct owners of the properties themselves. These second-tier LLCs are each owned by one of the two operating companies. Since the owner is a single entity (i.e., either an S corp or a MM LLC), that means that it is a single member LLC.

You determine how many properties go into each SM LLC. Since the point of these second-tier LLCs is to separate your assets to protect them, you have to decide how much separation you want. One property per LLC creates more paperwork and organization, but offers the greatest separation. Many properties reduces paperwork, but offers less protection. You decide the trade-off that works for you. Some have said that the limit each SM LLC to 3-4 properties (for example), others have said they limit the asset value in each SM LLC (e.g., $300,000 per).

That’s my understanding and it makes sense.

Ron Guy

Response to John & Frank… - Posted by Ron (MD)

Posted by Ron (MD) on January 06, 2002 at 09:50:55:

John,

Thx for the responses.

It does make sense to me that I have a separate account for each LLC to maintain greater legal separation between them and, hopefully, greater liability separation.

Another expert told me that I only needed one checking account for the “master” LLC (i.e., the multi-member LLC) and that account could be used to pay bills for the sub-LLC (i.e., the single member LLC that directly owns the property). I like that increased simplicity, but was concerned about the perceived separation between the two.

I assume this also means that I have to maintain completely separate accounting records for the two LLCs. Then, at tax time, the sub-LLCs roll up into the master, but each is kept as a separate company in QuickBooks…right?

One last question. I understand the point of having a C corp to do management, sales, etc., which allows me to control income to that entity. Frank said he was doing that. However, he also mentioned that his tenants would pay rent to the LLC that owns the property. My understanding is that the tenants would pay rent to the C Corp. Since the C Corp is the property manager, virtually all income and outgo would happen there and then, periodically, the C Corp would remit the “net income” back to the LLC. The LLC has very few transactions aside from the original purchase of the property and then the receipt of the net income from the property manager (C Corp) on a quarterly basis. Do I have that right? If so, do you still say that I should maintain a separate checking account for each LLC (rather than just one for the master)? I guess it’s not that big a deal to have multiple checking accounts, but I was trying to avoid it if they were’nt really necessary.

Regards,

Ron Guy

Multi-tier LLC’s - Posted by Dan_NC

Posted by Dan_NC on January 23, 2002 at 18:42:14:

Ron,
Thanks for your response. I think the part I was missing was that the MM LLC & S-corp are peer entities and own (are the only member of) the SM LLC’s. Makes more sense now.
Couple of thoughts:
Wouldn’t a MM LLC at second level be better for asset protection against charging order etc? One member being the scorp or 1st level llc and second member you or your wife. I’ve seen several others using SM LLC’s the way you talked about and I wonder if its a trade-off to avoid paperwork, reporting etc?

Bronchicks documentation appears to say SM LLC is not allowed in MD…but you’ve already set one (or more) up? Any problem with that?

Also, I believe husband/wife LLC will be viewed as single member LLC by courts. Any way around that without bringing in a third party?

Like I said, I’m anxious to get busy setting up a similar structure so I appreciate the opportunity to learn more about it from those that are doing it.
Thanks,
Dan in NC

The Accounting Mechanics - Posted by Frank Chin

Posted by Frank Chin on January 06, 2002 at 13:49:55:

Hi Ron:

I’m glad I’m able to talk through this with you, John, and David who’s doing it.

My “C Corp” will be up and running this month, and I’ll be setting the books for it. Its a good time as any for me to have this discussion.

Here are the issues as I see it:

1- If the ownership of the property resides in the LLC. Each LLC entity will have its own books, for rental income, and expenses, i.e., PITI, management fees etc.

2- But if all of the cash flows through the “C Corp” then the “C Corp” property manager collects rent, and pays expenses on behalf of its client LLC’s, and rental income collected will be “Rents collected Payable” to its LLC client. Expenses paid will be “Expense Paid Receivable” from its respective LLC client. Correct?

They’ll be several accounts within each of these payable and receivable ledgers, each corresponding to an LLC.

3- When the “C Corp” settles up with the LLC, lets say quarterly, then all the offsetting Receivables and Payables on the C Corps books would be netted out on the “C Corp” side, and the corresponding Income and Expense entries made on the LLC side.

The “C Corp” would in the settlement issue a check payable to the LLC, or to you directly on behalf of the LLC.

The “C Corp” will generate a “Managemant Fee” due entry from the LLC which will be included in the netting.

4- Alternatively, if I have my LLC is collecting the rent, and issues checks directly for its own expenses, then it’ll be all simple cash accounting Income and Expense entries, wouldn’t it?? Deposits to the checking account would be income, and checks issued would be expenses.

Then, when my LLC makes a check payable to the “C Corp”, quarterly lets say, then the management fee is booked. And the "C Corp will issuing checks for medical insurance premiouns. The “C Corp” would have a rather simple P&L.

Mechanically, this seems a bit cleaner and more efficient than doing it the other way.

5- In view of the problems cited above, I would have a separate checking for each LLC, rather than go through a netting process amongst the different LLC’s.

6- But if you’re up to 8 or 10 LLC’s or more, then I can see doing intercompany netting using a bookkeeper.

Frank Chin

Re: Response to John & Frank… - Posted by DavidV

Posted by DavidV on January 06, 2002 at 11:12:44:

I do it the way you propose Ron, collect rents via the C corp and pay all expenses from there. Seperate account per LLC (3 properties per) and have the C corp remit any funds to the LLC on a quarterly basis. No problems yet.

Re: Multi-tier LLC’s - Posted by Ron (MD)

Posted by Ron (MD) on January 24, 2002 at 10:27:24:

Dan,

Like I said earlier, I’m very far from an expert in these legal matters. Maybe someone else can shed some light on your follow-up questions.

As for the legality of single member LLCs in MD, I have to admit, you made me nervous. (I don’t have Bronchick’s asset protection material.) The articles of organization required by the state make know reference to the owners/members of the LLC…that’s laid out in other docs that don’t go to the state. I called my attorney (this morning) and he said that MD’s original LLC laws did not allow single member LLCs. Subsequently, the law was changed, so I’m okay.

Ron Guy

Re: The Accounting Mechanics - Posted by Terry (Houston)

Posted by Terry (Houston) on January 06, 2002 at 20:59:07:

I saw where one forum stated that the management company charges 20% per gross income per property.Can I get your thoughts on this?

If you are doing the marketing and repairs through the C’ what would be fair to charge for that service? I am just trying to get some ideas.

I too am setting up this way per the great adice from John. But all rents will go through the C and I will itemeize the net out quarterly.

Terry

Re: The Accounting Mechanics - Posted by Ron (MD)

Posted by Ron (MD) on January 06, 2002 at 16:48:10:

Frank,

I like the idea of running most of my transactions through the Management Co. (C Corp) for a couple of reasons.

From a business perspective, I like the idea of a single entity as the public “persona” of my operations. Whether I’m renting or selling, I can use the same company name. If I ever become a land baron like yourself, all tenants will be writing checks to the same management company. The management company will deal with vendors, contractors, tenants, etc. That seems simpler to me and I get more marketing benefit from one company representing all my vast holdings :slight_smile:

From an accounting perspective, I think I’m better off running the bulk of the transactions through a single entity so that that bank account will be the active account and the others will be “minimum balance”, relatively inactive accounts.

Ron

Re: The Accounting Mechanics - Posted by DavidV

Posted by DavidV on January 07, 2002 at 21:39:25:

The average in my area is more like 10%. I used a management co. for an out of town property that charged 6% and one half of a months rent for each new tenant. Worked good for long term tenants. I use 10%. You may want to call some companies and see what they charge in your area.

It would be interesting, if one charged twice the going rate in one’s area for a management fee, what the IRS would say if audited. Or would they care??? I would also be curious what others are charging for their management fees.