Multiple Entities... - Posted by JHyre in Ohio

Posted by Bronchick on February 07, 2002 at 08:40:02:

I have answered the Q many times, “Bill, how many entities should I have?”

This depends on 3 issues:

  1. What state you live in (CA charges $800/entity/year, whereas, CO charges $50).

  2. The amount of equity - $50k properties don’t need one entity per property. 100 unit apt building worth $2.5M probably do.

  3. How much paperwork you want to deal with - there becomes a point of “diminishing returns” if you can prove to a court of law that each entity is legally separate.

Multiple Entities… - Posted by JHyre in Ohio

Posted by JHyre in Ohio on February 07, 2002 at 06:31:47:

Recently, I’ve gotten a lot of questions on and off line, to this effect: “How do I account for my business entities if I form an LLC for each property I own?”

I think having one entity per property is vastly over-rated, except in the context of high-value commercial properties. In fact, one property per entity probably provides LESS benefit than several properties per entity. Here why:

  1. Transaction costs- between maintaining separate bank accounts, books and tax records and paying annual state fees for each entity, the price in time and money goes up unecessarily.

  2. Piercing the veil concepts- courts are more likely to ignore the liability shield of an entity if several factors are present. Two of the factors: Undercapitalization and “instrumentality”. If each entity has one property, and that property is low value or is leveraged such that there is little equity, we have a good case for undercapitalization. An entity is an instrumentality if it is the “alter ego” of its owner, with no “mind and management” of its own. One sign of an “instrumentality” is excessive subdivision of a business…how could a RE business possibly be more subdivided than one enitity per property? This is logical for large, high value properties…but is prone to be disregarded for smaller properties in my view.

This does NOT mean multiple entities are bad…just inject some reason into structuring the business. A separate entity for a separate line of business should hold up and be cost effctive. Similarly, separate entities once a certain quantum of value (equity) is attained per entity should also pass muster. One property per entity (outside of commercial context) strikes me as counterproductive.

John Hyre