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LLC Q&A on Holding Company Corporation

LLC OWNERSHIP

LLC Ownership has many advantages, but should be set up properly. Recently a student LLC Q&Aasked me about  whether a corporation should be the holding company (daddy corporation) for all of their real estate investment LLCs. I would love to hear your comments. Use the box at the bottom to comment!

Q: Why are you not a big fan of layers in corporations?
A: As soon as you start “layering companies,” the structure is only as strong as the weakest link. Keep your companies isolated from each other. You don’t want to have links between your entities. LLC ownership should be separate and not linked.

Q: Is there a problem with our having 3 LLCs owned by us personally rather than our revocable trust?
A: You should have the member (owner) of your LLC be the living revocable trust just for probate avoidance. LLC ownership by the trust shouldn’t make any difference for asset protection or privacy if you own the LLCs in your name or in the trust’s name. You can change your LLC ownership (membership interests) into the trust at any time.

Q: Would it make sense to create more corporations (LLC, S-Corp, C-Corp) to umbrella everything as a daddy corporation and then have the trust own the daddy?
A: BAD BAD idea. Never have a corporation own an LLC. That is a very bad asset protection idea, because the corporation has only half the asset protection of the LLC. You are losing half the asset protection when you make the corporation the owner of the LLC membership interest.

Q: So corporate LLC ownership is even less than ideal – it’s a disaster?
A: A corporation does not have the charging order protection. If you get in trouble personally (get sick and declare bankruptcy) then your creditors will get the stock in the corporation. Once they have the stock, they own the corporation including all of its assets aka the LLCs. If the LLCs are just in your name (or trust’s name) the creditors have to get the charging order and they can’t get the assets of the LLCs. They just get the economic lien on the profits of the LLCs. You still own and control, if you just have the LLC. BUT with the daddy corporation if the attack comes from the person side of the wall, you lost everything. Big difference!

Q: If we open LLCs in order to only hold rental property AND use our trust as owner, should our accounting be as an S Corp?
A: Accounting doesn’t have to be S corp. LLC ownership has nothing to do with taxes. You can choose how your LLC is taxed. It could be taxed as a sole proprietorship (disregarded entity), a partnership (if the LLC ownership is two or more members), or a C or S corporation. In this case you probably want a sole proprietorship or partnership. To be taxed as a partnership you would need your daughter or someone else on the LLC as a little owner. If you are in a common law state (not community property) then the husband’s trust could be one owner and wife’s trust could be the other owner in order to achieve the multiple membership required for the partnership status.

Q: Would there be no payroll since it is all passive income?
A: That’s why it is OK to have it taxed as a sole proprietorship or a partnership. The passive income will “flow through” to you.

Q: Should we have the management company running everything?
A: It is a good idea to have a management company separate from the company(s) that own your real estate investments.

Q: How does that fly with the IRS?
A: The IRS doesn’t care how you tax your entity.

Q: Do you know of an attorney in my part of the country that deals with this sort of thing, and will not charge me for every 7 seconds of time? Our guy is great for the real estate portion but this asset protection stuff stymies him, and the attorney I used for our wills, trusts, etc. costs me body parts every time I call with a question.
A: Actually, most of the attorneys are down to a 5 second billing clock now. just use your Accumulation and Preservation of Wealth set. It should answer your questions. If you are really worried about LLC ownership, structure, and maintenance, get my LLC Wizard course. It includes six hours of audio instructions (indexed of course) with all the supporting hard copy documents and everything on a computer CD. You shouldn’t ever have to spend another dime with a lawyer when you are creating or dealing with an LLC issue. You can call me about the LLC Wizard and I will answer the question–no charge. I would prefer to have the call, because I talk faster than I type, and many questions are best explained in a phone conversation. Just keep it short. Some attorneys think it’s polite protocol to never say hi or bye. (It’s that 5 second thing.)

Lee Phillips, JD

2 Comments
  1. I have your preservation of wealth program I started an llc before I got it I have 3 properties in it unfortunately I am now divorced and my tax preparer sent in a final return I did not want to close out my llc I can do single correct it cost me 1500 to set it up don’t want to lose out on that kinda money and how can I get it reset up single with out costing a ton ???

    • If you need to change the ownership of an LLC, in most states, there is no filing requirement with the Secretary of State when there is just an ownership change. You merely vote on the change in a business meeting and then set it forth in a written resolution. You then take care of re-issuing the Certificates of Membership Interests. However if the registered agent or office information has changed because of the change in ownership, you must update that information with the Secretary of State’s office. You can check with that office to see how they want it done. There will probably be a small fee, but you should not have the expense of starting over.

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