Whew, lots of good information here but I am still unclear being new at it. So with the S-Corp in the mix, does all of the profit from the LLCs get funneled up into it?Then management fees are paid to the S-Corp or the person managing the S-Corp? I’m assuming that it works just like an LLC with pass through income to the owner.
Apartment businesses / commercial has for some time accepted the SEC reg D rules and most pooling of investor cash is done via an SEC registration and PPM offering memorandum, $10k to $15k from many SEC attorneys. From the above I don’t see the mention of “PPM” so I’m guessing that cash investors in MHPs are being done with JV agreements? Is there a subscription agreement? The LLC operating agreement is the key to how cash investors money is handled and when problems arrise how things work assuming a per property LLC and all cash investors are a class of owner in the LLC? Just trying to get a bit more detail on what folks here do re cash investors?
I like answering questions, forgive me if I am long-winded:parkinvestor – It’s pretty important for the park holding entity to have its own tax returns so you can show the bank/investors/etc. Unless you “check the box” to be treated as a corporation, an LLC with one member does not file its own tax return. So if you want to hold the park in an LLC, it has to have two (distinct, taxable) owners – in which case it is treated as a partnership.If an entity has only one owner and you want it to file a tax return, then you should make it an S-corp. An S-corp can have one owner but still file a tax return (and you can show that to the bank, investors, etc).In either case, the tax liability is “passed through” to the owner(s), so the entity is not actually taxed, but it does have file return and the income shows up on schedule K-1 delivered to the owners. (No double-taxation).Another advantage of an S-corp is that it can pay its owners as employees (on a W-2) and there are certain advantages to that. But there are disadvantages to S-corps and self-employment taxes and such, so the choice between S-corp and LLC is complicated. A partnership (or LLC taxed as a partnership, which is the default if it has more than one owner) cannot employ or pay a salary (wages on a W-2) to its partners.Curt504 – if I were taking investors (which I am interested in, by the way, but have not yet done), I would create two (or more) classes of members in my LLC and lay out the rights and duties of each class very clearly. For example, my parks are currently inside LLC’s with two classes of members, Class “A” and Class “B”. Class “A” has all the voting rights and gets to select (and fire) the officers of the LLC who have all the power to manage the operations. Class “B” members are non-voting members (that’s exactly what I call them when I show the structure to the bank). The passive (cash) investors would be Class B members and they have a right to the income (per the agreement) but they cannot do anything with respect to management.Brandon@Sandell
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Your detailed posts are greatly appreciated and tremendously helpful! Regarding each park having its own tax return, I am guessing that is just to make all the numbers “official” so to speak, right? In other words, since everything is reported to the IRS it’d hold more influence with banks and investors than a single owner showing them their Schedule E along with “unofficial” forms generated from Quickbooks like a more detailed P&L, balance sheet, and so on. Or is there another reason I am missing?
No, kg2, you have it exactly right. The reason is for the bank (or buyer). If I am buying a park, the owner can show me a Quickbooks printout and if they fudge the numbers, well, what’s the harm? The tax returns at least have a little more authority. It’s not that people can’t or don’t lie to the IRS, but the person who does that has a lot more to lose than if they’re just misleading me personally.Brandon@Sandell
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If park LLCs and mgmt LLC are all sole-owner, should park LLC cash (in excess of what’s needed for working capital) be funneled out of park LLC regularly? I would assume you are better off making a habit of moving cash to entity with no or minimal assets.
I recommend keeping large cash holdings in non-operating entities usually, or even personal accounts. This makes the money harder to reach in the event of a huge liability or contract dispute with a third party. For instance, if you do three things:
- Own the real estate /park (lots of assets, moderate risk)
- Own park owned homes (less asset value, high risk)
- Own notes on homes you sell (high asset value, low risk)
Setting up all three as separate entities makes an additional firewall in the event of a catastrophic liability or contractual issue.
Do you think a single member LLC is better off applying for its own EIN and filing its own taxes in order to keep things clean for a future potential buyer? Or will the single member effectively have a schedule in his personal tax returns that shows the same thing? Probably a dumb question but want to make sure I get off on the right foot.
Your tax documentation will not change just because you get an EIN. The records for the LLC should be maintained in the same separate way irrespectively that would support good data for a Buyer. You can show the MHP financials as part of your schedule C which can be provided as part of the diligence process.
Understood, thanks very much
A single-member LLC is a disregarded entity for federal income tax purposes. So you would not file a tax return for a single-member LLC, regardless of whether it has an EIN or not.
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To add to this topic of LLC’s…
If I buy a MHP and set it up as an LLC. When going to a ‘bank’ for a loan, I’m assuming they are going to want a personal guarantee from me on the loan. If this is true, will this be an issue from the liability protection of an LLC?
Thanks,
Michael
The personal guarantee is your agreement for the bank to pierce your LLC’s veil to obtain your personal assets in the event that you default on your loan.
But Joe Blow who trips on your curb, breaks his leg, and sues your LLC for damages could not use the loan your LLC has on the property with the bank as an example of you intermingling personal funds with the LLC’s money. That could only be done if you have other bad behavior that demonstrates piercing the veil (e.g. writing off your wife’s car as an MHP expense).
If you’re really concerned check with your attorney. I am not one.
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Thank you for the response
So let’s simplify, because I am still lost with too much info.
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I am a single owner (no business partners)
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Obviously I want to set up each park in its own LLC, for my own legal protection–no questions here.
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I may buy more parks but not sure. At this point a separate MANAGEMENT LLC is not needed from what I am reading here.
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But a separate LLC for the park (PARK LLC), and the homes (HOMES LLC), seems wise to separate the risk. KurtKelly recommends even a third entity for the notes. In my case, its about 5 homes for about 20k , so not sure this justifies yet a third entity.
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I usually have my LLC’s, partnership and individual, setup to do be taxed as an individual because otherwise, after a certain point (reasonable salary) you start overpaying on medicare, etc… but it sounds like for loan purposes, it is better to use my wife as a partnership so we get a k-1. Is this right? Mind you, filing taxes on a partnership requires a k-1 and costs $1k+ per year (maybe someone can recommend a lower priced, yet good accountant).
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I understand using docs, and accounting statements on both LLCs, to do transactions between entities, so that they will be viewed as such.
Addtl. Questions:
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Which entity/ies are tenants making checks out to? PARK, MANAGEMENT, HOMES, NOTES, etc…?
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Following the last question, do I generally need bank accounts for each? Seems a bit tedious to manage so many accounts/cards/etc…
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It sounds like it would be better to have my wife be on one LLC (e.g. PARK LLC), and I on the other (e.g. HOMES LLC), because if one gets sued, the other is unaffected due to different ownership. Correct? Even then, I am limited in this case to two people, so I am guessing one on the PARK (high value asset), and the other on the remainder (low value)?
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However, my name on one entitiy and wife on the other conflicts with the other goal of having both people on a partnership LLC for taxes (separate income statements from personal).
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Naming the parks in this case: Does it matter? For simplicity, I was thinking “street name + PARK LLC” and “street name + HOMES LLC”.
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Eventually, I want to setup a trust, but not sure it matters at this step because I just closed on the first park.
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Paying myself: Out of which account am I paying myself, and does it matter if its separate from funds I am saving for buying other parks or investments?
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Moving cash out of business account: Would seem wise to keep funds from building up in the main business account(s). So, would I have yet another bank account, or even LLC, to park this?
You say, consult a an attorney? I cant tell you how many completely wrong attorneys I have hired, even if they said they were very experienced.
I believe just having husband and wife as owners will not create a taxable partnership because you already are viewed as a single entity for tax purposes. That said, it might not be so important to create a separate taxable entity as long as you have the formalities of a separate company.
Tenants should make lot rent out to Park company. Yes you will need a separate bank account for each entity. Ideally you would have home rent paid separately to Homes company but we don’t do this, we just account for it in our books. I wouldn’t create a separate company just for 5 notes, but I would hold them in Homes co. By the time you get to a dozen notes maybe a sister company is a good idea.
Names - doesn’t matter.
Paying yourself - unless you are an S-corp, you cannot employ yourself in a partnership. Your “earnings” are taken as a distribution (or dividend) when there’s spare cash. You will be taxed on your taxable profit (gross income less tax-deductible expenses) without regards to how much cash you take out it leave in.
You should indeed take money out to avoid it building up in the business, but you should leave enough working capital. You’ll find a middle ground (take $5k when there’s more than $10k in the bank for example). You can always (you will have to!) put money in for big expenses.
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Couple more thoughts in addition to Brandon’s:
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Don’t name an LLC a silly or potentially offensive name (ex. Poor Schlubs LLC). Name it something that won’t negatively affect you in a courtroom or in some public filing
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Separate LLC’s for homes, real estate/park ownership, management companies, and Note holding are fine in practice, but too many creates more expense than the additional loss control may be worth. I like the ideas above, but not for a park owner with 1-3 medium to smaller parks
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I like separate Federal Tax ID’s/FEIN’s for my entities. It’s easier to keep track of for me and banks tend to like them better. It’s just another K1 on my personal tax report so not much more work
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If you are going to set up separate LLC’s for risk management purposes, you must treat them as separate businesses. For example, If ABC, LLC owns the park and XYZ, LLC owns the homes, a tenant in a park owned home can make one payment (ex. $800) to either entity, but the recipient LLC (ex. ABC LLC - site rental $400) should write a check to the non-recipient LLC (ex. XYZ, LLC - rental home rental $400) for the portion of the payment related to the to the rental home
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why do you advise taking title in a land trust with your LLC as beneficiary?
Hello!
You really need to attend one of Pete Fortunato or Dyches Boddiford’s classes to fully understand.
But in a nutshell:
- Land Trusts will make you anonymous. Only your Trust’s Trustee will be exposed to the public
- Land Trusts circumvent probate
As regards forming an LLC, whether you have a land trust or not, an LLC shields your assets in the event you get sued. You don’t ever want to own real estate (or most anything else) in your own name.
To your continued success,
-Jefferson-
Seems Pete doesnt offer courses/content and Boddiford is sold out, but this looks like a low-cost, memorable option:
Asset Protection Series Volumes 4 & 5: Land Trust & Personal Property Trust - Assets 101
Are there other/better options out there?