24 Jul Single Member or Multi Member LLC
Dear Illinois REIA: Should I set up a Single Member or Multi Member LLC ? As a business strategy I want to start doing fix and flips and want an LLC for the liability protection. Up till this point I’ve been considering a single member LLC since. The reason for that is I won’t have any partners.
I’ve been reading Loopholes of Real Estate and got worried when I heard a few states (like Florida) can still go after the owner in a lawsuit against the entity in a single member LLC. Apparently they see it as only one person’s asset. Can you shed some light on this? Would it be better to add someone to the business, I know I’d get taxed harder and have to have workers comp so that’s why I’m trying to avoid going that route. Thanks in advance.
From a liability position the lawyers can go after anybody they want to drag into court. Whether you choose a Single Member or Multi M ember LLC won’t make a difference at that point. Whether or not they win is based upon a couple of things. First can they prove you or your entities liability? The second is do you have anything they can take from you. One of the best strategies we ever heard is to own nothing in your own name but control everything. The deciding factor will more than likely not be whether you choose a Single Family or Multi Family LLC.
There is no one single asset protection strategy. You need a combination of strategies. You need to use insurance and land trusts first and foremost. Then add an LLC, corporation or my personal favorite a Family Limited Partnership with a C Corporation acting as the General Partner. That is in my opinion the best business entity. A single member or multi member LLC is not the only asset protection strategy you should consider.
The very best course I have seen on estate planning, asset protection and trusts (other than land trusts) is by Lee Phillips. We can put you in touch with him if you send me an e-mail.
Best book you should read: “Lawyers are Liars” by Mark J. Kohler.
Income Tax Returns for Single Member or Multi Member LLC
Now to your question, the annual income tax return for a multi member LLC is DUE March 15th. The late filing fee is $195.00 PER month PER Partner. 2 partners 6 months late the fee is 12 times $195.00 or $2,340.00. You must file a return EVEN if you made no investments or profits. A Zero return must be filed.
A single member LLC can be treated as a small business and be added to your personal return with “Schedule C”. You can avoid the multi member late filing penalty by doing this.
Partners or Employees
The other members of an LLC are not employees. A single member or multi member LLC makes a distinction. There are no other members in a single member LLC. With a multi member LLC they are all partners. They are partners who can take independent actions that may not align with your desires. Why would you want a partner? They can do something stupid and get you sued for everything your LLC owns.
Partners have decision making ability. Avoid partners at all costs. Hire mentors, get an education but avoid partners. Everyone I know who took a partner in Real Estate investing has ended up with financial and legal issues. Many who were friends before the partnership are no longer speaking to each other. You don’t need that kind of drama or stress in your life.
Employees are not partners and cannot be members of your LLC. Employees create stress. You need to file income tax withholding forms. Depending on the size of your payroll this can be annually or quarterly or even monthly, Now you need to pay for an accountant. The other thing about employees is you need to buy insurance to cover their stupidity. Liability insurance is reasonably priced. Worker’s Compensation Insurance is through the roof. Are you going to offer medical and dental?
Out of state Single Member or Multi Member LLC
When attending real estate investing seminars do not get conned into buying an out of state LLC. They charge up to $6,000 and promise you the state such as Nevada has no state income tax. That is actually true. What they don’t tell you is that you will need to pay an annual franchise tax to maintain the Nevada LLC PLUS pay a registered agent. They also fail to mention that your business will be required to register and file as a foreign entity here in Illinois and still have to pay income tax to the state of Illinois as a foreign entity.
When you flip a home the profit on the sale must be dealt with in the LLC It is not your personal slush fund. Follow the rules or deal with the IRS. You may also incur additional legal fees when making the sale since the LLC is not a person. The title company may just be smart enough to demand you have an attorney present at the closing. Just like you cannot represent your LLC or corporation in court you should not represent it at closing.
Here is a better and less expensive solution:
You live in Illinois, the Birthplace of the Land Trust. Place your personal residence in a land trust. Make yourself and your family the beneficiaries or the “Beneficial Interest” of the land trust. Choose a trustee you can depend on. The trustee can be a business you own. Even a DBA sole proprietorship with ZERO assets can be your trustee. Place your vehicles, furniture, jewelry, other personal property and even your check books into personal property trusts.
When you buy a property to flip, purchase it in a land trust. Instead of buying an insanely expensive workers comp policy for you and your partners you should instead buy a million dollar liability policy and a million dollar Commercial Umbrella for you business entity. You know which one, the entity with no assets. Hire only subcontractors who have their own liability and work comp insurance.
At closing after the flip, the assets are distributed to the beneficial interests of the trust as directed by the TRUSTEE. You tell the trustee what to do in a letter of direction.
Whether you choose a single member or multi member LLC, your best course of action is to own nothing in your own name. Set up a land trust for your personal residence and pay rent to the trust for the privilege of living there. Use that rent to cover the mortgage, real estate taxes, insurance and maintenance. Talk to the person who prepares your income tax return about how to set this up properly. The trust can have its own tax id number.
Full disclosure: I am not an attorney, nor do I play one on television. Always seek competent legal advice on any contracts, documents, asset protection strategies or estate planning ideas. If you do not have an attorney let me know and I can point you in the right direction.