We had a fantastic response to our webinar for real estate investors, Avoid These 5 Mistakes That Will Blow Up Your Real Estate Deductions. It will be available at this link for the next couple of weeks, along with the special offer of our Real Estate Accountant in a Box program. There were so many listeners with so many questions that we couldn’t fit everyone in, even after spending an extra 20 minutes online! So, this week we’re dealing with the questions that didn’t get answered.
I had a lot of questions regarding Series LLCs. If you missed Tuesday’s entry, we talked through the basics of what they are and some things to think about before you decide a Series LLC is right for you.
In today’s blog, I wanted to answer some more Series LLC-related questions:
Do You Need a Separate Bank Account for Each Cell in a Series LLC? And, Do You Need a Separate EIN for each Cell in a Series?
The answers will depend on what you’re doing with the Cells. Those are the little mini-LLCs that are formed underneath the parent LLC. By state law (if you’re in a state with Series LLC law) Cells have separate asset protection and rights, as long as they’re set up and run properly.
In a situation where the Cells are clearly operating independently from the parent LLC and each other, the answer to both of those questions is probably going to be yes. For example, if I was using a Series LLC in connection with an MLM business, where I had multiple positions, then you bet I would want a separate EIN and bank account. My MLM probably isn’t going to let me run multiple positions unless I can show that I have separate companies, and the EIN/bank account combination is one way I can do that.
Another time I would say Yes to both questions is when you’ve got Cells owned by different people, or with different tax classifications. In each case the Cells have to act independently for tax reasons, and they can’t do that unless each Cell has a separate tax identity. There’s no sense in comingling all of my funds together in that kind of a situation – it will just lead to a fight between owners over where the money coming in should go, plus it will be a nightmare to track and keep accurate records.
Now let’s look at it another way – when would the answer be NO. I think this will come back to real estate, actually. Let’s say I have a portfolio of properties. I own all of them, and I’ve got them divided up amongst 7 Cells in my Series LLC. But I don’t want to manage them all individually. I’d rather use one Cell as a property administration arm, and have all of my tenants pay just that one Cell. In this case I can have a single bank account for the property administration Cell. That doesn’t mean I won’t keep separate bookkeeping records – I certainly will. But I won’t be running 7 separate checkbooks each month.
Now I can pay all my bills from one account. If I’m buying a car for use in the business, I can allocate my costs across the 7 Cells on my books, even though I just write one check.
In this case I also may not need separate EINs. If I’m the sole owner, I can treat each Cell as being disregarded for tax, owned either by me directly, or owned by the Parent LLC. Because they are disregarded, the Cells don’t necessarily need separate EINs – they’re going to either report on my personal return, under Schedule E, or they will consolidate onto the tax return of the parent LLC.
Sound confusing? Hopefully not – but when in doubt, talk to your tax or entity advisor about the practicalities of operating a Series LLC. It’s not the same as a regular LLC, but it’s not so difficult that you can’t manage, either. It’s simply a question of understanding the structure and how each piece fits together.