Rental Properties

[Pelado]

lol nice Circ 230!

3r23zq.jpg

[Donuthole]

For liability protection, yes, get an LLC (NOT a corporation). As for the tax implications, as 3D mentioned, it depends on the ownership. If you own the LLC individually, the LLC will be considered a disregarded entity and you will report the activity on Schedule E of your form 1040 as if there were no LLC.

So a single-member LLC gets transformed into a sole proprietorship for taxation purposes, effectively speaking. But apparently not for liability purposes? That seems to run counter to the reason for the existence of the LLC structure, i.e. shielding the assets of one member from the liabilities of the LLC/another member. Does that really hold up? If you are the only member of the LLC, isn't the LLC's liability essentially your liability? Also, it seems like piercing the veil on a single-member LLC wouldn't be that difficult. Where my wife and I file a joint tax return, having her as a member of the LLC would be insufficient to create a genuine multi-member LLC, no?

Just thinking out loud here a bit.

[Pheidippides]

So a single-member LLC gets transformed into a sole proprietorship for taxation purposes, effectively speaking. But apparently not for liability purposes? That seems to run counter to the reason for the existence of the LLC structure, i.e. shielding the assets of one member from the liabilities of the LLC/another member. Does that really hold up? If you are the only member of the LLC, isn't the LLC's liability essentially your liability? Also, it seems like piercing the veil on a single-member LLC wouldn't be that difficult. Where my wife and I file a joint tax return, having her as a member of the LLC would be insufficient to create a genuine multi-member LLC, no?

Just thinking out loud here a bit.

My experience (which is different than DDD's) is that piercing the veil has a lot to do with how well you keep up corporate formalities. Are both you and your wife members with votes? Do you make sure to properly document decisions for distributions? Do you keep records of contributions and capital accounts? Do you have a meetings to decide what to do with the LLC, even if they are in bed? Then you are much better off than somebody who just uses it as a slush fund.

But, really, what's the real harm if the veil gets pierced? You are no worse off, in theory, than you would have been without the LLC in the first place.

[Pelado]

So a single-member LLC gets transformed into a sole proprietorship for taxation purposes, effectively speaking. But apparently not for liability purposes? That seems to run counter to the reason for the existence of the LLC structure, i.e. shielding the assets of one member from the liabilities of the LLC/another member. Does that really hold up? If you are the only member of the LLC, isn't the LLC's liability essentially your liability? Also, it seems like piercing the veil on a single-member LLC wouldn't be that difficult. Where my wife and I file a joint tax return, having her as a member of the LLC would be insufficient to create a genuine multi-member LLC, no?

Just thinking out loud here a bit.

The treatment for federal tax purposes does not invalidate the liability protection provided under the state's LLC statutes.

I may not have fully considered the advantages, but the sole benefit I've seen for most husband and wife LLC's goes to the tax return preparer (NTTAWWT).

[Pelado]

My experience (which is different than DDD's) is that piercing the veil has a lot to do with how well you keep up corporate formalities. Are both you and your wife members with votes? Do you make sure to properly document decisions for distributions? Do you keep records of contributions and capital accounts? Do you have a meetings to decide what to do with the LLC, even if they are in bed? Then you are much better off than somebody who just uses it as a slush fund.

But, really, what's the real harm if the veil gets pierced? You are no worse off, in theory, than you would have been without the LLC in the first place.

A little quibble - some states have relatively hefty LLC fees and/or taxes (California, I'm looking at you). Other states, like Idaho, charge little up front ($100) and have no annual fees for maintaining the LLC (though there is a simple annual report required).

[Donuthole]

But, really, what's the real harm if the veil gets pierced? You are no worse off, in theory, than you would have been without the LLC in the first place.

I agree with this completely. Just as I sit here thinking about it, I'm wondering if there are a lot of members of single-member LLCs out there who aren't getting the liability/asset protection they think they are getting. I'm sure it is different in every state, of course, and my state certainly offers some of the strongest protections for business entities.

[Pelado]

I agree with this completely. Just as I sit here thinking about it, I'm wondering if there are a lot of members of single-member LLCs out there who aren't getting the liability/asset protection they think they are getting. I'm sure it is different in every state, of course, and my state certainly offers some of the strongest protections for business entities.

As P-Diddy said, those that haven't kept up formalities probably have a lot less protection than they think. Still, it's generally better to force the claimant to pierce the veil than to not have the veil at all.

[Pheidippides]

I agree with this completely. Just as I sit here thinking about it, I'm wondering if there are a lot of members of single-member LLCs out there who aren't getting the liability/asset protection they think they are getting. I'm sure it is different in every state, of course, and my state certainly offers some of the strongest protections for business entities.

Nevada, Texas and Delaware are the best of the best from a management perspective. Nevada and Texas are actually, in my opinion, better than Delaware, but Delaware has the huge body of law and the court of chancery.

There are some tax costs and filing fees, as pointed out above, but they should be relatively cheap when compared to potential liability if something really bad happened. Heck, I'd just build the annual cost into the rent if the market allows.

[thesaint258]

Nevada, Texas and Delaware are the best of the best from a management perspective. Nevada and Texas are actually, in my opinion, better than Delaware, but Delaware has the huge body of law and the court of chancery.

There are some tax costs and filing fees, as pointed out above, but they should be relatively cheap when compared to potential liability if something really bad happened. Heck, I'd just build the annual cost into the rent if the market allows.

What about putting the house in an asset protection trust? I've never dealt with those, so I don't know how the liability works, but it seems like there would be some good advantages there.

[Pelado]

What about putting the house in an asset protection trust? I've never dealt with those, so I don't know how the liability works, but it seems like there would be some good advantages there.

Is it a grantor trust? If not, then it's going to be taxed at the trust level, and the tax losses could be sitting around collecting dust for quite some time.

[TripletDaddy]

So a single-member LLC gets transformed into a sole proprietorship for taxation purposes, effectively speaking. But apparently not for liability purposes? That seems to run counter to the reason for the existence of the LLC structure, i.e. shielding the assets of one member from the liabilities of the LLC/another member. Does that really hold up? If you are the only member of the LLC, isn't the LLC's liability essentially your liability? Also, it seems like piercing the veil on a single-member LLC wouldn't be that difficult. Where my wife and I file a joint tax return, having her as a member of the LLC would be insufficient to create a genuine multi-member LLC, no?

Just thinking out loud here a bit.

You are asking the right questions. As nik and others mentioned below, you still have to act like an LLC to reap the benefits. Make sure your operating agreement and other org docs are solid and comply with whatever state you are choosing as home base (you already know this). SMLLC rules vary from state to state but often remedies can include dissolution of the LLC to foreclosing on the members shares to piercing.

[PaloAltoCougar]

So a single-member LLC gets transformed into a sole proprietorship for taxation purposes, effectively speaking. But apparently not for liability purposes? That seems to run counter to the reason for the existence of the LLC structure, i.e. shielding the assets of one member from the liabilities of the LLC/another member. Does that really hold up? If you are the only member of the LLC, isn't the LLC's liability essentially your liability? Also, it seems like piercing the veil on a single-member LLC wouldn't be that difficult. Where my wife and I file a joint tax return, having her as a member of the LLC would be insufficient to create a genuine multi-member LLC, no?

Just thinking out loud here a bit.

Others have responded but I'll add some surplusage. The tax treatment of an LLC (as a general partnership for multiple member LLCs, as a sole proprietorship in the case of single member LLCs) has nothing to do with the question of liability for the LLCs debts (well, other than for taxes). Remember that general partners have unlimited liability, just like sole proprietors do. Liability exposure for LLC members is not affected by tax treatment. Moreover, having personal liability for the taxes is often a good thing, as LLC ownership allows the member to write off losses against other income which the member couldn't do if the entity were a C corp.

In the case of community property states, a husband and wife can choose to have their LLC treated as a partnership or as a sole proprietorship and can file accordingly (partnership return or Schedule C). Couples not in community property states file as a partnership. If you really care, the IRS provides more guidance on the subject.

One of the advantages of an LLC over a corporation is that corporate formalities aren't usually as extensive. But to avoid even the small risk of someone seeking to pierce the "LLC Veil", the client should take care that all communications be clearly identified as coming from the LLC, and not just from a member (i.e., the person doing the communicating should be identified as a manager officer), the entity should stay current in its state filings, and it should adhere to whatever modest procedures are set forth in its organizational documents.

And if this isn't dull enough for you, we could start a thread on Series LLCs and how one shields the liability of one subset or series from others within the same LLC. This is becoming increasingly common for, among others, real estate holding companies. Rather than create an LLC for each parcel, one creates a separate series within a single LLC for each building, etc., with different membership structures for each series. Zzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzz.

[Pheidippides]

Others have responded but I'll add some surplusage. The tax treatment of an LLC (as a general partnership for multiple member LLCs, as a sole proprietorship in the case of single member LLCs) has nothing to do with the question of liability for the LLCs debts (well, other than for taxes). Remember that general partners have unlimited liability, just like sole proprietors do. Liability exposure for LLC members is not affected by tax treatment. Moreover, having personal liability for the taxes is often a good thing, as LLC ownership allows the member to write off losses against other income which the member couldn't do if the entity were a C corp.

In the case of community property states, a husband and wife can choose to have their LLC treated as a partnership or as a sole proprietorship and can file accordingly (partnership return or Schedule C). Couples not in community property states file as a partnership. If you really care, the IRS provides more guidance on the subject.

One of the advantages of an LLC over a corporation is that corporate formalities aren't usually as extensive. But to avoid even the small risk of someone seeking to pierce the "LLC Veil", the client should take care that all communications be clearly identified as coming from the LLC, and not just from a member (i.e., the person doing the communicating should be identified as a manager officer), the entity should stay current in its state filings, and it should adhere to whatever modest procedures are set forth in its organizational documents.

And if this isn't dull enough for you, we could start a thread on Series LLCs and how one shields the liability of one subset or series from others within the same LLC. This is becoming increasingly common for, among others, real estate holding companies. Rather than create an LLC for each parcel, one creates a separate series within a single LLC for each building, etc., with different membership structures for each series. Zzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzz.

Geez, PAC, I was just getting over my LLC-related PTSD.

[jay santos]

You can have your LLC taxed as an S-corp. Even as a single member, LLC. This is very common.

[Pelado]

You can have your LLC taxed as an S-corp. Even as a single member, LLC. This is very common.

But with it holding appreciable property, that's not usually recommended.