Starting a Small Business/LLC's
QUESTION: I have several rental properties and am getting ready to form a series LLC with one property in each series. I have a few questions regarding this.
1) Originally I was looking at a single member LLC, but have read several things recommending against it. Now I am considering having my son as a silent partner. What are your thoughts about the difference between the two scenarios? If I do take him as a partner, what is the minimum % of ownership he can be given? After initial formation and capital contributions, when I add capital, such as actually deeding the property into the LLC, does he have to make a contribution as well? (i.e. if his ownership in the LLC is 2% and the house is valued at $50,000, does he need to add $1000?) The houses are all in my name only. If he doesn't make further contributions, does that change the ownership %, or is that % driven by the original setup in the operating agreement?
2) I know avoiding commingling of funds is extremely important and I have a question about the use of a credit card. Would it be acceptable to have a single credit card under the "parent" LLC's name and on a monthly basis invoice each series for the charges that were put on it for that series? Each LLC will have its own bank account and I am willing to do whatever is necessary to ensure no commingling, but on the flip side if I can do so without having to carry around 15 debit cards that would be a plus.
3) Another question with regards to the commingling issue. Almost all of my properties have mortgages on them in my name. Is there a commingling issue with the LLC paying the mortgage? If so, is there a way around it, such as putting something in the operating agreement to cover it? How would you word it?
If you have any other comments, suggestions or recommendations, I am open to all the information I can gather regarding the formation of this series LLC. Thank you for your assistance! I appreciate your time on this matter!
Here are my answers to your three questions:
1) In terms of personal liability for obligations of the limited liability company, there should be no difference between a single member LLC and an LLC with multiple members. There is a concern, however, in some states, that if the sole member of a single member LLC files for bankruptcy, a creditor may be able to reach the underlying assets of the LLC. Where there is more than one member, typically a creditor is only able to obtain what is known as a charging order. A charging order only entitles the creditor to receive distributions from the LLC that would have otherwise gone to the member against whom the charging order was issued. The creditor with a charging order is not able to take control of the underlying asset, force its sale or otherwise influence the management of the LLC.
I don't know any reason why there would be a minimum percentage of ownership that your son could hold. I suppose at some level the ownership level could be so miniscule (say, 1000th of 1%) that a court might ignore the ownership as a sham. As far as his putting up capital is concerned, if he puts up no capital but gets an interest in the LLC, that will likely be treated as a gift to him from you. Depending on the value of the LLC interests, as well as any other gifts you have made to your son during the year, it may or may not be covered by your annual gift tax exclusion.
Likewise, if you make additional contributions and he does not, but he still retains his percentage interest in the LLC, it is likely that your additional contributions would also be treated as gifts to the extent the value of his LLC interest increased due to a portion of your contribution to the LLC.
2) Piercing the corporate veil is a question of fact. I think it is unlikely that using a single credit card of the "parent" LLC that is paid from the separate accounts of the individual series, would itself be sufficient to create a problem. However, use of a single credit card combined with other co-mingling, poor record-keeping and other contributing factors could tip the scale in an evaluation of whether the circumstances warranted piercing the corporate veil. It sounds like you have a good understanding of what you need to do to avoid co-mingling, so I would not be particularly concerned about using a single credit card.
3) When you say "Is there a commingling issue with the LLC paying the mortgage?" I assume that the LLC you are referring to is the series LLC that owns the respective property. My answer to that is no but when you transfer the property into the name of the series LLC, your documentation should make it clear that the LLC is assuming the liability for the mortgage. That assumption will not let you off the hook since the mortgage is still in your name, but as between you and the LLC, it should be clear that it is the obligation of the LLC. Particularly if the LLC has other creditors, you'll want to be clear that the asset of the LLC is subject to the liability, which would stand ahead of any other creditors.
I hope this helps.
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QUESTION: I am finally finding the time to look at hiring an attorney to draw up an operating agreement for a single member series LLC for rental properties. What area of expertise would it be best to go with? I didn't know if I should go with someone who specializes in real estate law, business law or something else. Thank you.
I suggest that whatever attorney you select, you find someone who has specific experience in creating series LLCs. There are differences between regular LLCs and series LLCs. You do not want to have somebody learn about the differences at your expense or, worse, give you improper advice or draft poor documents.
Since you already own the real estate, the real estate issues involved switching the ownership of your properties to a series LLC are pretty basic. It is really a matter of business law, not real estate law.
Since series LLCs are often used in connection with the ownership of real estate, some attorneys who focus their practice on real estate may have the knowledge and experience with series LLCs to properly handle the matter. If forced to choose between a "real estate lawyer" or a "business lawyer," I think the latter is more likely to have the experience you need. However, it is more important to focus on their specific experience and knowledge with series LLCs rather than how they generally describe the nature of their practice.