So the ownership LLC provides a clean break between my personal name and the business. Lets say, in my name I owned a car, and a house, and a second home where I like to vacation, and maybe an IRA and some stock investments, some savings, personal checking acounts etc…- Unless I really did something bad- that would pierce the LLC- those should be insulated from my ownership of the parks. The park would have insurance- thus attorneys. My Holdings LLC has insurance, thus attorneys- then comes me and my personal assets. I had someone break into a home we were rehabbing and fall through a weak spot in the floor while they were carrying out new cabinets. They hurt their leg. Did you catch that part about- breaking in… They tried to get me to pay the medical bills! Then- the filed on me for constructive nuance. I guess we did not lock the house well enough… anyway- they did not win- but the lesson is, your tenants will find a attorney to file on anything if they think they can get anything from you. We live in a country that seems to believe we need to protect people from themselves. sum it up- CYA
I own several commercial properties and have each set up as separate LLCs. All retail and office. I manage them all myself. I do not have a separate Management LLC over the group of them. I now have the opportunity to purchase a mobile home park. I understand the concept of having a Park LLC, a Management LLC and a Home LLC. Unlike my other properties where I manage the day to day events, there is an onsite manager living in the park that would be doing so. I would like to eventually own more parks, but for all I know, this may be my one and only. I was planning on putting the park in a separate LLC like I have done with my other properties, but had not considered a Holding or Management LLC over the Park LLC.Do you advise layered LLCs for just one park?
First- you must consult your accountant and attorney on this. I separate all of my parks into their own LLC,s. That said, I own apartments and single family rentals in a combined LLC- though they are all in the same state. So if the ownership was the same- and that was very clear on both properties, one LLC would probably do. Though, they are tied to each other as the same basic asset- so there is no firewall between them. Could you- yes.Would I- no. Anything new I bought regardless of asset class would be in its own LLC…
I wanted to chime in because this is a subject I am pretty comfortable with as a former tax lawyer. This is going to be a long post, sorry! (This is not legal advice, you are getting what you pay for, I am not licensed to give legal advice in your state, etc.)We do things almost exactly how Jim explained, although I think he meant “S” corp instead of “C” corp at the end of one of his posts. But there seems to be some confusion on the nature of LLC’s and Corporations and d/b/a’s.A “DBA” is name that is registered with the state so that you may operate with an “assumed name” and get bank accounts and checks in that name, but it does not do anything else, legally speaking. It is just an alias.An LLC is a state-law entity that provides liability protection – so that if you get sued, only the assets (money) in the LLC is at risk. “Disregarded Entity” is a (U.S. Federal) tax term. An LLC is not a disregarded entity for tax purposes unless it has exactly one (100%) owner – then it is “disregarded” for tax purposes. If it has 2 or more owners, it is treated as a partnership (files a partnership tax return) and divides the income among the owners according to a schedule K-1. This is called “pass-through” taxation because there is no corporate tax owed – the income and taxes are “passed through” to the owners. In the US, people like that because the personal income tax rate is lower than the corporate income tax rate (under most scenarios). I must admit I am not familiar with the Land Trusts that Jefferson likes. Trusts, LLC’s, partnerships, corporations, etc – these are all creations of state law, and the rules (and case law) vary from state to state.Just a wrinkle to keep things interesting: an LLC (or a partnership) can elect, just for federal income tax purposes, to be taxed as a corporation. But it’s still an LLC (or a partnership) for everything else (under state law). There is generally no benefit to “checking the box” to be treated as a corporation for federal tax purposes this unless you have a good reason. I will provide the only good reasons I can think of at the end of this post.A corporation is another kind of state-law entity that provides liability protection. There is a special tax-code feature that you can apply for to have a corporation treated (or an LLC electing corporate treatment) under a special section of the tax code (subchapter “S”) in which case it, too, will divide the income among the owners according to a schedule K-1. Otherwise it will be treated under subchapter “C” of the tax code. Nike, Microsoft, Google, are all “C-corps.” S-corps are limited in size (fewer than 100 owners) & flexibility (only one class of stock so all owners must have equal rights).In other words, an “S-corp” is a pass-through (and files a form 1120S tax return with K-1’s). An LLC or a limited partnership is a pass-through (and files a form 1061 with K-1’s). A traditional “C-corp” pays its own taxes with its own tax return and whatever money is left over can be held by the corporation or distributed as dividends (which the owners have to include as income and pay taxes on). Most people want pass-through taxation.There are minor legal differences between S-corps and partnerships and LLC’s, both in state law and in tax law (which is federal law). Sometimes they are taxed differently at the state level. One of these minor differences relates to how owners can receive their benefits, and this one reason I can think of to prefer an S-corp to an LLC. The other, major, reason to prefer an S-corp is if you can’t come up with a second owner of your LLC to make it NOT a disregarded entity. I would advise creating/using one LLC per park and one LLC per set of park-owned homes. That’s all you need. Creating an LLC is a matter of filing a form with the secretary of state and obtaining a federal tax ID number if it has more than one owner (remember, single-member LLC’s are “disregarded” and the income will show up on the owner’s tax return). It is very easy and you do not need to pay a lawyer or someone to do it. If you are sharing the ownership with someone else, though, you will absolutely, positively, want a written LLC agreement and for that I strongly advise a lawyer. There are many, many items to consider and you want them all written down so that you can point to them when you and the other owner(s) disagree about what the proper course of action is in any particular situation (for example, what to do when you need money or want to sell the asset).You do not need a “Management LLC” unless you have many parks and really need a separate accounting system to cover all of the overhead expenses of running the rest of the parks together. We do this for our operation but we have 9 sub-LLC’s among 4 parks and the management LLC is where we charge all of our overhead (office space, insurance, travel, etc). Each park pays the management LLC a monthly fee to cover its expenses. But if I ran just one or two parks, I wouldn’t worry about it, I’d just assign all my overhead expenses to one or the other of the parks and call it a day. I would, however, advise figuring out how to have 2 owners of every LLC so that you have park-specific tax returns to show the bank, prospective buyers, investors, etc. If you would otherwise own 100%, you could share with your spouse or create an S-corp just to hold the other ownership interest. Since the S-corp is NOT disregarded (even with 1 owner), the LLC will have 2 owners and be able to file its own taxes. Otherwise, unless you want to get pretty sophisticated or you are really worried about something specific, you do not need a separate ownership LLC to hold your interests in all your Park and Home LLC’s. An example of a reason to do so would be to unify your financial statements to show investors, banks, etc. (They might give you better terms to lend to your ownership entity if you show the income from 5 parks rather than just one, etc). As far as what you need while doing due diligence and/or looking for parks – you don’t really need an LLC until you have money at risk. You can sign a contract for purchase and later either “assign” the contract to the LLC or have your closing lawyer make the LLC be the owner of record at the time of closing without ever assigning the contract. I don’t think there is a real difference unless you are worried about some kind of liability before you actually close on the deal. Maybe your plumber you hired to do due diligence trips and sues you for asking him to go survey the park before you purchase it. That’s pretty far-fetched and I wouldn’t lose sleep over it.I was catching up on this forum and there was another post recently about whether to have the rents collected by the “management company” or the “park company” – the “park company”, of course! Anything tied to the rental of the dirt should be income or expense to the “park company.” That includes on-site management and anything else that is park-specific. If you don’t know why you need a management company, you probably don’t need one.I’ll reply if anyone has follow-up questions – but it might be a day or three…Brandon@Sandell
Thank you all for your comments. Brandon, I always enjoy your detailed replies. Very helpful. Thank you.
Thanks Jim and Brandon, that was very helpful. I have a few questions. Please correct me if I have it wrong.The park is in it’s own LLC, which has it’s own bank account that deposits, rents, late fees, etc.The S Corp is managing the park and being paid by the park LLC, it has it’s own bank account that deposits management fees and pays our travel expenses, etc. I’m interested to know how you determine how much the management fees should be.If LLC is set up for asset protection, how do you (or do you) keep the bank account of the park LLC down to a minimum? And if you do then how do you go about paying bills?We are closing on our first park in a few weeks and I’m trying to get my head straight about how to do the record keeping so you could show a bank, investor, etc the true bank balances without having your asset (bank account) at risk.Thanks for your help.Leighnae Fabian
Maybe I missed the DBA question being answered but if it was, here it is again:A DBA is just another name for yourself. If the DBA is sued, you are sued, since it is just another name for you. An LLC is different from you. You may own the LLC but the LLC owns what it has in its name. If it is sued only the things it owns are at risk, like the MHP it may own, but not your house, which it does not own. BTW: I like Nebraska for LLCs Formation cost: $120Annual fee: $10Income tax: $0Online registration: yesDocument complexity: minimalRegisteredAgents.com $59/yearPretty hard to beat.
As a general rule, owning property via an LLC or S-Corp is a good investment from a risk management stand point. C-Corps protect you well from liability too, but generally result in double taxation. I regularly recommend using entity ownership vs personal name for all real estate purchases other than a home (and then only do to financing limitations if it’s not in your own name).As for buying a property in your own name and then flipping it into an LLC, I’d recommend you never title it in your own name, even if the contract was in your name. Doing so may give you some tail liability for having ever owned the property. Make sure the title is transferred in the beginning into the LLC. Jim’s ideas on the segmentation and use of the LLC’s noted above fits my understanding very well. Finally, if you do use one or more LLC’s, make sure they are ALL listed on your insurance policies. Too often property owners use an LLC for a segmented risk or reason, and then fail to advise their insurer of the new LLC. Then when a claim is levied against the LLC, you have a significant potential coverage issue.
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
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
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.
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