In my last post I talked about when it can be appropriate to have a single business structure wearing multiple hats. Today I want to talk about how the same applies to LLCs.
A typical new client call often begins with something like: “I’ve got seven homes, two owned outright, and more than 50% equity in each of the others. Can I put them all in one LLC?”
My problem (well okay, my first problem) with that is … how is putting all your eggs in one basket any different from holding them in your hands? If you are sued personally all of the assets you hold in your own name are at risk. If one of your properties in the LLC becomes subject to a lawsuit, all of the other assets held in that LLC go along for the ride.
So is seven LLCs the answer? I don’t necessarily think so either. I think it may be better to take a look at the risks involved with each of the properties. Do you have any properties owned outright? In a lawsuit, those would be the most attractive to the person suing you. I’d definitely want to see those properties protected and held separately in their own LLCs. Do you have multi-unit properties as well as single family homes? The more people on the premises the higher the risk, so if you had an apartment building, it may be better off on its own.
How about several properties with minimal equity? If they are all physically located in the same state, the answer could well be yes. In this case you don’t have a lot at stake personally. Multiple entities = multiple operating costs, so you’ve got to weigh that, especially if your properties aren’t cash flowing, or the cash flow is minimal.
Where your assets are located matters, too. If you’ve got properties held in multiple states, putting them all into one LLC is going to guarantee you and your CPA a headache at tax time, when you have to separate out what money is taxable in what state. Or you’ll run up against a state like California, which taxes income regardless of source. In this instance I’d definitely prefer to see properties broken out on a state-by-state basis.
At the end of the day it really boils down to your level of risk tolerance. How much are you comfortable putting on the line at any one time?