Main Street Business

#572 LLC Masterclass: Everything Every Business Owner Should Know!

• Mark J Kohler and Mat Sorensen

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In this episode of the Mainstreet Business podcast, host Mat Sorensen kicks off the LLC Masterclass series with the questions every entrepreneur, investor, and side hustler needs answered:

 Do you actually need an LLC?
 How do you set one up the right way?
 What about paying yourself?
 How many LLCs should you have?
 And which state should you form it in?

With over 20 years of experience and 10,000+ LLCs formed for clients across all 50 states, Mat breaks down the four main reasons why forming an LLC might be a smart move for your business or real estate investments. He covers asset protection, business legitimacy, partnerships and investors, and how to properly structure rental properties and estate planning.

Whether you're just starting your first business or growing a real estate portfolio, this episode will give you a solid foundation on how LLCs work—and why they matter.

✅ For tax and legal planning with your LLC, visit kkoslawyers.com
✅ For LLC compliance support, go to mainstreetbusiness.com

Speaker 1:

Welcome everyone to the Main Street Business Podcast. This is Matt Sorensen, your host for today, and I'm going over LLCs. This is the LLC Masterclass Series I'm gonna be talking about how do I set up an LLC, do I need an LLC? How do I pay myself from an LLC? How many LLCs do I need? What states do I need to register my LLC? And answering all those questions today for you in the podcast. Please enjoy.

Speaker 1:

Do you need an LLC for your business or your real estate investments? Well, I've been an attorney for 20 plus years, set up over 10,000 LLCs for my clients across the country, and in today's video, I'm going to break down what you need to know, or I'm going to go over the four primary reasons you should set up an LLC. Now, you don't have to have an LLC. I'm not saying everybody needs an LLC, but if one of these four situations occurs for you, you should have an LLC. The first thing do you need asset protection? Well, who needs asset protection? Business owners, whether it's a main hustle or a side hustle. Real estate investors you've got tenants, people going to the property. We need asset protection. What is asset protection? How does that work in an LLC? Let me break this down for you quickly here. All right.

Speaker 1:

So an LLC is a limited liability company. That's what LLC stands for the liability of the business owner. You is limited so that if something happens in the LLC, in the business, the plaintiff, whoever it may be, is forced to sue the LLC. They can't come after you personally. This is reason number one asset protection. So, for example, if you have your LLC called XYZ Enterprises, let's say, and you own that business 100%. Or even if you have partners, doesn't matter. And let's say, something happens on a rental property or you got a business you're selling goods or services, something happens with a customer or tenant, well, they're forced to sue the LLC. They can get what the LLC owns, but they cannot come down to you, the business owner. So I'm limiting my liability and I'm getting asset protection from the LLC. That is the number one reason to have an LLC is to protect you from the liabilities of your business. And that's not the only reason, but that's the primary reason. All right now.

Speaker 1:

The second reason here is you're starting a company. You're gonna interact with customers, with vendors, you're gonna have employees. If you don't have an LLC, you're gonna look like someone that doesn't know what the hell they're doing. You're gonna need some type of entity to go out and actually conduct business. Now a lot of people say say well, matt, why can't I just have a DBA? You can, you can go get like a DBA and just register a name doing business as. But if you want that business to grow and be successful I'm just saying a lot of people your potential customers, contractors, vendors, employees are not going to be excited to go work for a sole proprietorship. That's a DBA. They want to understand they're dealing with a real company. So what do real companies do? They set up LLCs or corporations. All right, so it adds this sense of legitimacy to you. You may not need it because you don't have a customer yet, but if you're going to grow and scale this business, you need to look like you're a real company, and that's another reason to have an LLC. We want some real company organization.

Speaker 1:

Now, the other thing I'll say about this is you're starting a company is you're going to need a separate bank account. This can't be in your personal bank account. When we have an LLC, you're going to set up a business checking account, maybe a savings account, in the business's name. That's where you're going to receive the income from the business. We want that separate from your personal bank account. There's asset protection reasons for doing that, but also you want to be able to track your income and expenses separate from what's happening in your personal life. Your business bank account is the best place to track the income and then all the expenses that you're paying out. If you're using that business checking account is going to be a clear record as you're doing your bookkeeping and you're trying to understand the performance of your business. Am I making money or not? Well, let's look at what the LLC business checking account has going on, but also from just past, like the income and expenses. Also, are you going to get a line of credit? Are you going to establish a business credit? If you don't have a separate business entity, you're not going to be able to do that. So starting a company is a primary reason to set up an LLC. Have some legitimacy, separate your personal income from your business income, be clear on the expenses in the business from your personal expenses and maybe start establishing a business line of credit.

Speaker 1:

All right, now the third reason you should have an LLC. What if you have partners or investors? What if someone's partnering in with you and providing some other services in the business. What if someone's investing in the company and being a cash investor or partner in the business? Well, you need an operating agreement in the LLC that's clear on what the ownership is. What's your responsibility and authority? How much ownership do you have as the founder of the business? What does this partner in the business get? Do they have 5% or 50%? What about the investor in the business that's putting money in? Do they have to put more money in when you need it? How do you deal with that? Okay, your operating agreement for the LLC is also like a partnership agreement. I'm going to talk about that in future videos, but this lays out what are the key terms and understanding between the different people who are owners in the LLC. I'm just telling you, if you skip having an operating agreement and you got other partners or investors in this deal, you are going to have chaos in the future. Okay, you need to be very clear and intentional about this operating agreement and what's your role? What are you getting versus, what's their role and what are they getting All right now, the last reason to consider here is for those of you that have rental property or other assets.

Speaker 1:

It makes sense to have an LLC to hold those types of assets. We talked about asset protection as being the primary reason, and this is super valuable. If you're starting a business where you're selling goods or services, you have a customer, a vendor dispute, an employee dispute, you don't want them coming after all of your personal assets off of your home or your retirement accounts, your savings, your brokerage account, your other businesses, your other properties. We don't want everything freaking exposed, so we want to use an LLC and operate that business in an LLC. Same thing if it's a rental property. If we go back to this example up here, the tenant slips and falls. They're forced to sue the LLC. They can't come after you personally. Also, for your real estate investors, the same principles we talked about here income, expenses, tracking this, keeping it separate critical for you as you're trying to make sure you're analyzing your business properly and reporting your taxes properly.

Speaker 1:

Now, we don't want to put all of our real estate into the LLC, but we do want to put rental properties or properties that can create liability into an LLC. So, for example, if you have a home, okay, I don't want your home in the LLC. There's no reason to do that. Are you going to sue yourself at your home? I mean sure you might have visitors, but we don't see really benefits to putting your home in an LLC. Rental properties with tenants, for sure, we're definitely doing that. That's what I'm doing with myself and my clients across all 50 states. We're using the LLC, but here for your home, we want to put that into a revocable living trust. Your revocable living trust is for estate planning purposes, it's not for asset protection. Okay, and I want to make sure that my heirs get my home and it goes through my estate. It doesn't have to go to probate. That's why we use a revocable living trust here Again, not asset protection, but we're doing it to coordinate and plan our estate for our loved ones when we pass on.

Speaker 1:

For investment properties, rental properties, we want to use an LLC because those do have risk and we want the asset protection benefits of the LLC. Now, maybe a second home or something as well. You could put that in a trust. Let's say it's an Airbnb. Sometimes you use it or you might rent it when you're not there. Okay, we might put that in the LLC, because there's other risks associated with other people visiting the property or acting as tenants.

Speaker 1:

So now, when you're setting up an LLC, I just want to go back to those four reasons. Do I need the asset protection on this? Am I starting a company? I need the legitimacy of an LLC, the separate bank account and separate treatment. Do I have other partners investors involved, where an operating agreement is to make clear who owns what in the business? And what about my real estate, my rentals and other assets? Do those benefit by bringing in an LLC? Do they create liabilities? And I want this layer of protection for those assets. If any of those four reasons hit, you should seriously be considering an LLC Now.

Speaker 1:

My law firm, kqs Lawyers, has been setting these up for decades and we can help you get it set up and structured properly. We clean up LLCs across the country as well, so we're here to help. But if you're not using us, get to a competent lawyer who's experienced in this area and watch out for the people that are not lawyers, that are selling entities online. Frankly, they oversell them for the wrong situations and they sell you way too many entities than you need. So you want to make sure you get to the right professionals that can help guide you properly. All right. You need to make sure that you set up your LLC properly so you're afforded all the benefits of the LLC that you thought you were receiving, and this is something a lot of people mess up. So I'm going to go through the process to make sure you understand how to set up your LLC proper.

Speaker 1:

All right, now there's four things you're going to need to set up your LLC properly. The first is articles and certificate of organization. Second is your tax ID and EIN and the proper tax classification. We'll get into more details there. Next is your operating agreement and initial minutes that clarify ownership and some other key asset protection issues. And then, fourth, is choice of tax status. There can be additional filings depending on whether you have partners or you're an operating business versus an asset holding business. We're going to get into that here.

Speaker 1:

So first, let's start off with the articles and certificate of organization that you need to file. Now, what this is is the actual filing to the state that says, hey, I want to be an LLC. Here's my name. Here's who's going to manage the LLC. Here's the address. Here's my registered agent that's going to get legal notices. This is the official filing that has certain requirements with the state where you're setting up the LLC. Now you have a few options when you're filing the certificate of organization or the articles. Different states call it different things. But the first choice you have is what state to even file this in.

Speaker 1:

And a lot of people hear oh, you should do it in Wyoming or you should do it in Delaware or Nevada. That's BS. You should set up the LLC in the state where you're actually conducting business. If you're conducting business in Indiana, you should have an LLC in Indiana. If you're conducting business in Florida, you should have an LLC in Florida. If you live in California and you have a rental property in Ohio, you're conducting business in Ohio. Okay, we're setting up the LLC in the state where you're actually conducting business. If you set up the LLC in the state you live let's say Florida, and you have a business or a property, a rental, in Ohio, you're going gonna need to register it into Ohio. Anyways, you need to register the LLC in the state where you're actually conducting business. So why pay two different state fees? As a lawyer, I've been doing this for 20 plus years. We've never understood this. Make sure you're just going to the state you're actually conducting business in. Now the one caveat to that is there is Wyoming and some certain strategies for privacy or double layer asset protection called charging order protection. I've got another video on that. Make sure you go over that if you wanna look into the Wyoming LLC and the benefits there. But nine out of 10 clients in our law firm we're just setting up the LLC in the state where they reside. All right.

Speaker 1:

Now the second choice on your articles or certificate of formation is is this gonna be manager managed or member managed? Now we always wanna go manager managed or member managed? Now we always want to go manager managed with our LLCs. The reason being is I don't have to disclose ownership. No one knows who owns an LLC on a manager managed entity. I only have to disclose who the manager is and the manager is like president of the corporation. They don't have to be the shareholder or owner, that's just the person listed with the state that has authority to act for the entity. If I did member managed and I list myself as the member, then it's very clear that I'm the member and owner of that LLC. So I'm losing some privacy because of that. We typically prefer manager managed entities. There are some strategies on privacy where you could have a Wyoming entity serving as the manager, so nobody knows it's you in the state where you're registering the entity. But for a lot of people, particularly if this is your business you're out selling goods or services or you're the entrepreneur in the face of the company we don't really care about privacy. We're just going to list you as the manager of that entity. All right.

Speaker 1:

Now the next thing you're going to need is a tax ID or EIN employer identification number. Now, this is a number that comes from the IRS. Now this operates like the social security number does for you personally. This identifies the LLC as a separate entity for tax purposes. It will get 1099s and other tax reporting for the business instead of it going to you. You need to get a separate tax ID. When you're setting up a bank account in the LLC's name, the two things every bank asks for is we want to see your certificate of organization or articles for the LLC and we want your tax ID or EIN. They want that number because they associate that with your entity and that gets the tax reporting, as opposed to your personal social security number. Now, to file this, you can do it online with the IRS. Our law firm, of course, is doing it. We're setting up entities for clients.

Speaker 1:

When you're filing this, you also need to decide how you want your LLC to be taxed. Now there's sole proprietorship status, partnership status, s-corporation status. I'm going to come back to that here in the final point about making sure you have the right tax selection for your LLC. Now the next document you need for the LLC is your operating agreement or initial minutes. Now, if it's just you as the owner of the LLC, we still want to do an operating agreement to say you own it a hundred percent. If you got partners, it's even more critical because we want to be clear who the partners in the LLC are. How much ownership do they have and what is their responsibility and roles in the LLC. This happens in the operating agreement and the initial minutes of the LLC that are outlining and approving all of these things. All right.

Speaker 1:

Now the final point here is your choice of tax status. When you're setting up an LLC and you're getting your EIN, you need to decide how do I want my LLC to be taxed. A lot of people mistakenly think LLCs save taxes. Llcs do not save taxes. Okay, but your tax status election for your LLC may make a difference on taxes. So you understand this very, very critical point. This is probably one of the things people screw up the most is they mistakenly elect the wrong tax election and they end up paying the IRS too much money. Now you have one critical decision here. Do I need to make an S election for the LLC and be taxed like an S corp, or should I just be taxed like a sole proprietorship? Now maybe you have partners. You're taxed as a partnership, but the really critical thing here is should I be taxed as an S-corporation? Now what we want you to file as an S-corporation if you are conducting an ordinary income business where you're selling goods or services and you have more than $50,000 of net income. If you hit that bucket, your LLC should be taxed as an S-corporation. If you have rental properties, your business is only making 10 grand a year, even though you're selling goods or services.

Speaker 1:

You have a side hustle. Don't worry about the S-selection, it doesn't matter for you, but any of you small business owners making 50K or more main hustle, side hustle this is net income. You will save money by doing an S-selection. Here's how it works. In an S-selection to an LLC or just in an S-corporation itself. What happens is, when you are paid income, you get to divide that income into salary and into dividend or net income, and that benefits you because it's an opportunity to save on self-employment tax.

Speaker 1:

Let's say you made $100,000 a year. Okay, this is after all your expenses. You made 100K. And let's say you're a sole proprietorship, you just did an LLC, taxed as a sole proprietor, you didn't file the S-election, the 2553 form with the IRS, and you just take that 100K. Well, how much self-employment tax do I pay? You pay 15.3%. Okay, this is Medicare and Social Security. That's the total tax that you end up paying on a hundred thousand, that results in $15,300 of self-employment tax. Guys, this is before you even pay federal income tax. Okay, this is just Medicare and social security because you're self-employed. Well, that kind of sucks. All right, I've got 85,000 left to pay myself here and I still got to pay federal income tax on this money.

Speaker 1:

Well, if you're doing an S corporation, paying yourself the same $100,000, what happens is in an S corporation, you're allowed to pay yourself a salary, which you do have to pay self-employment tax on, but another portion of the funds you can pay yourself as net income or dividend profit out of the business, which is exempt from self-employment tax, which is where you get tax savings. So, for example, if you're making a hundred K, maybe we take a $40,000 salary which you take as a W-2, and the other 60 K you're going to pay yourself as dividend or net income. Now I pay 15.3% over here on that 40 K and I pay nothing in self-employment tax over here. And now the savings here is I'm only paying $6,000 in self-employment tax over here versus paying 15,300. This is where I saved. I didn't pay 15% over here, I didn't have to. Okay, that saved me $9,000 in taxes to the federal government. This is $9,000 you can be saving every year if this is your income level.

Speaker 1:

So make sure you understand the S-corporation tax strategy when you're using an LLC. When you have an LLC, you can elect to be an S-corporation. Maybe in year one you're like, eh, I don't know that, I need this. I might make 10 grand this year, but year two I'm going to bump up and I'm going to hit this 50,000 net income. Well, you can make the S election status in that second year. Okay. So you have some optionality here, but you need to make sure that you understand that, because it's more money in your pocket If you get the tax election right and if you jack it up, you're going to be overpaying the IRS. So make sure you're focused on this and paying attention. All right Now.

Speaker 1:

The last thing here I want to mention is you don't need to file a beneficial ownership information report to FinCEN and the Department of Treasury. This is a new thing that came out a couple of years ago, where you had to make a filing for your LLC or corporation to the federal government, disclosing US Supreme Court on it, going back and forth on this. So, bottom line, don't worry about the FinCEN BOI filing. That may come back in a later administration, who knows? But in 2025, right now, don't even have this on your radar. You don't need to stress about it. Skip that step for your LLC, all right.

Speaker 1:

How do I actually pay myself from an LLC Once you've already set it up? This is kind of a critical question. Right? I'm making money in this thing. How do I actually get paid? All right Now. The first thing I want you to think about is you are now an entrepreneur. Okay, You're not getting a paycheck. We are not talking about enrolling and getting a paycheck cut every two weeks.

Speaker 1:

All right, I'm going to go through a number of different considerations that you need to have as you're paying yourself from your LLC. Now, the first thing you're going to need to have is an LLC business checking account, all right, so we're going to have our LLC and let's say it's Vandelay Industries LLC. Okay, and you've got your bank account that the LLC owns. All right, this is not you. You're going to have your separate personal bank account. This is just your business bank checking account. You're receiving your income. This is your goods or services you're selling. This could be your rental property income doesn't matter here. But the business has its own separate checking account. Great for tracking your income and expenses, but also critical here to make sure you're maintaining asset protection.

Speaker 1:

What you're going to do is you're going to take a draw from the LLC business checking account to yourself personally. This can go to your personal bank account. This is all we're doing here. It might seem simple, but we're transferring money from the business checking account to your personal checking account. Now, how you tax support it here we're going to come to in a second. It depends on your structure, but for now, no matter what you're doing or how your tax or your sole proprietorship.

Speaker 1:

You're an S corporation. We are simply transferring money from our business checking account to our personal account. There's income there and when we want you could leave money in the business checking account for purposes of working capital or you might need it to grow the business. And if you want money personally, you simply take a draw. Generally we don't want to leave a lot of cash in the LLC business checking account. Don't accumulate cash there. It's a liability risk. You're conducting business there. You might have tenants. They could sue the LLC and get at that cash. We only want to keep enough cash in the business checking account necessary for business operations. Otherwise we want to send it down to you personally, get in your personal checking account and from there go out and invest and build and grow other assets or use it for your personal expenses, whatever your scenario may be. But the bottom line here is you're going to simply do bank transfers to your personal checking account.

Speaker 1:

Now, depending on how you're taxed, is the tax reporting that's going to occur? Now you simply have two different scenarios here. Typically, we're going to have you taxed as a sole proprietor, as a sole prop. This means this is just going on schedule C or maybe it's a rental property going on schedule E, but you didn't do what's called an S selection. If you're a sole prop, all you're going to do is this is a draw. You're going to track it that way in your QuickBooks or in your accounting or financials and the money's going off the balance sheet of the company down to you as the owner of the company. Now then, at the end of the year, you're simply going to do your profit and loss for your sole proprietorship on Schedule C or again on Schedule E for the rental property, and you file your taxes. No payroll reporting, no W-2s happening, all right. This is simply self-employment income coming down on Schedule C for those of you selling goods or services and this is the sole proprietorship. It's a lot simpler and if you're making 10, 20 grand a year, this makes sense.

Speaker 1:

This is a side hustle. Do the sole prop, or even if those of you that have rental properties, again, you don't need an S selection for this. It's just flowing down onto your personal 1040. We got the LLC for asset protection. It's not saving us taxes, but we are still having the business bank account and taking draws and transferring that money to us personally whenever we have the necessary cash flow or whenever we need it personally to live off of or make other investments. Now, if you are an S corporation, it's different. Okay, we're still doing this same step up here, where I have the LLC with its checking account at a bank. Okay, and this is a business checking account and it is transferring to you personally and you're still doing that whenever you want. Okay, we're still doing a transfer from the business checking account to your personal bank account and this is still essentially a draw.

Speaker 1:

Now, the big distinction here for those of you that are an S corporation is, even though you're taking draws and transferring the money from the business account to your personal account whenever the heck you want, you're not necessarily doing a payroll and cutting yourself a paycheck and doing a withholding every two weeks, but you need to be doing at least a quarterly payroll. Okay, I have my own S corporation. This is what I do for mine. This is what are many of our clients at KQS Lawyers that we're setting up, that are operating in LLC taxes and S corporation or that have an S corporation directly. You're doing a quarterly payroll. This is like a little after the facts payroll.

Speaker 1:

So how much do I actually claim as payroll. For example, maybe you paid yourself $30,000 in draws that you took from the business, but only 10,000 of that are you going to consider to be wages or payroll income. That is the amount you're going to put on the quarterly $10,000, and maybe it's 15.3% self-employment tax. So I'm going to need to send in $1,500 in my self-employment tax for Medicare and social security. But the other 20K that I took from the business I'm deeming that to be profit or net income from the business, again exempt from self-employment taxes. I went over in the earlier video.

Speaker 1:

So, but this is a critical step here understanding that salary dividend split or salary net income split here, but making sure you're at least filing a quarterly payroll and then at the end of the year you're going to do a 940. It's an annual form. Now your accountant will do this for you. If you have an accountant, they can do your payroll for you. You could use QuickBooks or ADP. Many of them understand this. I actually use ADP. We do an after the fact quarterly payroll like this for my own S-corporation pretty seamless, easy strategy.

Speaker 1:

Now for those of you with LLCs with rental real estate or other investment assets, don't do that S-corporation. Don't file a quarterly, you don't need to do that. Okay, you're just going to take draws to your personal bank account. Now you may have estimated tax payments. You're doing on a quarterly basis. This is different from payroll. Okay is different from payroll. Okay.

Speaker 1:

Your estimated tax payment is something you can send in the IRS every quarter. Let's say you're going to owe a hundred thousand dollars in taxes at the end of the year from your business, your real estate, your other entrepreneurial activities not from your W-2, because your W-2 is going to have payroll withholding. But if you're having estimated tax payments a hundred K, you expect for the year you'd send in $25,000 to the IRS. That is a separate form from the 940 and the 941. That is your payroll stuff. Okay, I'm just talking about estimated income tax payments that you could send to the IRS and the state. So don't forget about those. Make sure you're tracking what you're making.

Speaker 1:

If you don't send an estimated tax payments when you file your tax return at year end, you will have some penalties. Now, they're not substantial, but the IRS will make you pay some interest and penalty because you're paying in late. They expect you If you made a hundred K, let's say in quarter one. They want a little bit of tax on that. Whatever the tax would be due, they want you to send that in an estimated amount and as long as you're close you're fine. There's no penalties or interest charge. Now a lot of small business owners don't do that. Okay, I've been around long enough. They kind of send in money when they can and they true it up at year end but realize you'll be paying a little bit of interest and penalty to go that route. The safe way is make sure you're sending in estimated tax payments. You don't get caught off guard and you'll avoid having to deal with interest and penalties when you file your final return next year.

Speaker 1:

Now, a good rule of thumb of how much to send the IRS each quarter is, let's say, 30%. Whatever your net income after expenses is, just send the IRS 30%. If you're making good money, more than a couple hundred thousand dollars a year, you're going to at least be in a 30% plus tax bracket, all right. Well, that's it here. As you're paying yourself from the LLC, it's mostly just going to be a transfer from one account to the other, going from the business account to your personal account. Remember for any of you that are S corporations. You do have that quarterly payroll report you do need to file to the IRS. You have some state unemployment stuff that needs to be filed. I just use a payroll company to handle that for you. Go, make more money in your business. Don't be a bookkeeper on the side. All right, hire that out, get your account or a payroll company to handle that for you.

Speaker 1:

Now, a common question I get as a lawyer is how many LLCs do I need for my rental properties? Now, as a lot of people get to this issue, they think well, matt, I have 10 properties. Should I have 10 LLCs? Should I have a separate LLC for each property? Well, our answer to that is always it depends, and I know people hate that answer, but I'm going to flesh it out for you here in a second, because it really depends on not how many properties you have, but how much equity you have between the different properties. All right, let's say you have an LLC, xyz Properties LLC, okay. And let's say it owns five rentals, okay.

Speaker 1:

Now the downside to having five properties in one LLC is if I have something happen on property number five here, let's say the tenant slips and falls, well, they can sue the LLC. They can't come down to me personally and get at my personal assets or any other LLCs or businesses I have. Those are all protected. I get asset protection there. But what is at risk is the other four properties in the LLC. I've got exposure here of all the equity from property number five, four, three, two and one. They're all in the same basket, so to speak, and people say, don't have all your eggs in one basket. Well, the problem here is, let's say, I have 200,000 of equity between each property. I've exposed a million dollars of equity here. Something goes wrong here on property number five. Well, that has put all properties at risk and their equity could be drained. Now we don't want that. So how do I prevent that from happening?

Speaker 1:

Now, obviously, I could do this option here and just have one LLC for each property, right? Well, that's a good option, and if these are like multifamily properties or commercial properties, we're definitely going to do that. But if these are single family rentals that have $20,000 of equity a piece in them, you leverage out the equity, their mortgage, to the hill, but they cashflow. I think you're overcooking it here. That is not worth it. Our rule of thumb is something in the middle here. What we say is we want a separate LLC once you have more than $250,000 of equity between multiple properties.

Speaker 1:

So for example here, let's say I have an LLC that owns two properties, all right, and one of them is worth a million dollars and it's got a $600,000 mortgage Okay, so I've got 200K of equity. The other is worth $700,000 and has $300,000 mortgage. So it's got 400K of equity. Okay, so I got a million dollars of equity here. Well, if something happens on property number one, again property number two is at risk. So in this example, it makes sense to separate out each property into its own LLC, not because I have two properties, because I have two properties with enough equity at risk, where the value of these properties each of them has more than $250,000 of equity is worth the cost and maintenance of an additional LLC. Another LLC is going to cost you $1,200. You're going to have annual fees to the state to keep it active.

Speaker 1:

I mean, we set up thousands of entities in my law firm, kqs Lawyers, every year. We'd love to just set up more entities and say you need an LLC for every property, but I don't think that's the case. Again, if you got five properties here, you could all have them in one LLC. If there's only 10 grand of equity, there's not enough equity at risk where a plaintiff's going to go after the properties. But if I got two down here with a lot of equity in them, I want the additional asset protection and the cost of that is now worth it, okay, because I have enough equity to be at risk. Now if I'm down here in this structure we have an LLC for each property. They both have hundreds of thousands of equity.

Speaker 1:

If something goes wrong on property number one, the tenant is forced to sue LLC number one. They can't get over to property number two and LLC number two. They get separate liability treatment. They can't get over to property number two and LLC number two. They get separate liability treatment. They can't come after me personally, so I'm able to contain that liability and that separate LLC. That is the benefit to having multiple LLCs. Again, don't think about how many properties I have. Think about how much equity do I have between the multiple properties.

Speaker 1:

We always say if you have 10 properties with 10,000 of equity between those 10 properties, put them in one LLC, we don't care, you have 100,000 of equity at risk. You still get the asset protection. If something happens on one of those 10 properties, they sue the LLC. They can't come after you personally. They can't get to any of your other entities, your other businesses you may have. So we've still got that liability protection. Now, sure, those other nine properties are at risk, but I'm just telling you, no plaintiff is going to chase down that LLC that has very thin equity. But a plaintiff will chase down $200,000, $300,000 of equity. That is worth their time and their money to chase down those properties. That is when we like separate LLC treatment.

Speaker 1:

Now just a little caveat here when you're doing multiple LLCs, some states have something called a series LLC and what that is is you have one LLC you file with the state and you can adopt something called a sub-series that can own separate assets and get separate liability treatment without having to file a new LLC at the state level. States like Utah, texas, nevada, tennessee, illinois there's about 15 other states that have what's called a series LLC. Now in that instance we love to use the series LLC for any of you that have multiple properties, real estate investments with some equity, because we only have to file one series LLC with the state and we can adopt these sub-series that get separate liability treatment and that way we're getting the benefit of multiple LLCs, but we only have one state LLC filing. So, for example, you had sub-series number one, sub-series number two, sub-series number three. These get separate liability treatment, just as a separate LLC does, but you don't have to have the multiple filings here. Okay, so that can be a little bit of a cheat code for any of you that are in those states that allow for series LLCs with multiple entities. We definitely love those and want to set that up if it works in your situation. And again, this is where the properties are located, not where you're located. Okay, we're going to be setting up this series LLC in the state where the properties are located. Okay, so if you live in Arizona but you have 10 properties in Texas, we're going to do a Texas series LLC for those 10 properties in Texas, and that could be a great solution for those again in the states that allow for series LLCs, and that could be a great solution for those again in the states that allow for series LLCs.

Speaker 1:

Now, do you need to register your LLC into multiple states? A lot of people are confused about where they need to register their LLC, whether they got a rental property or an operating business. Now I'm assuming here in the video that you've set up an LLC already in a particular state and you have the question of I'm conducting business in another state. Do I need to register my LLC foreign into that other state? You can have an LLC registered into multiple states. For example, I'm here in Arizona and I've had an Arizona LLC for rental real estate that I also registered foreign into Indiana. The reason I did that is I had a rental property in Indiana, so I registered the same LLC an Arizona LLC as a foreign LLC into Indiana. If you're an operating business, you might be doing the same thing. I'm conducting business in another state. Do I need to register in that other state?

Speaker 1:

Okay, I'm going to go over the reasons here of why you need to make sure you're doing this properly, because there's fines and penalties and potential loss of asset protection, but also want to get into when are you required to register foreign? Okay, so let's get into the first part here of why should I be focused on this? Well, the first thing is, if you don't register LLC into the state you're actually conducting business, you can lose your asset protection benefits. Actually, if your LLC is not registered in a state and you get sued in that state. Let's say you have a Wyoming LLC for a property in Florida and you have a plaintiff sue you in Florida Guess what? You can't even go into court. You have to register that Wyoming LLC into Florida for a Florida court to even recognize you All right. So you got to be careful about this, just from asset protection and the fact of conducting business, that you make sure you're registered in the state you're operating.

Speaker 1:

Now I'm going to get into when this triggers and when you need to file in another state. But the first thing here is I want to make sure you understand you need to do this to make sure you're actually able to protect yourself and have the asset protection benefits and to be able to be a legitimate company able to transact or represent yourself in court if you are sued or need to conduct business. A lot of times I've had clients with rental properties in other states and the title company won't transact with them, they won't transfer title. They're like this LLC isn't even registered in this state. Okay, so you've got to make sure that you're registering the LLC in the states where you're actually conducting business.

Speaker 1:

Now the second consideration is fines and penalties. Let's say you're in Nevada and you're conducting business into California and you have a Nevada entity. Well, the state of California will fine you up to $10,000, a maximum fine if you don't actually register in that state when you're actually conducting business in that state. Now I'm going to come back here again to what constitute conducting business. That's important, but obviously, if you're servicing customers, you have an office or employees in California and you're operating out of Nevada even that's where you live but you don't register into California, you are going to be subject to these fines and penalties. So, again, you're going to need to get compliant and register into that state where you're conducting business. Now I know people hate California. They don't want to register their LLCs there because they've got an $800 annual LLC fee, no matter whether you make money or not, I know it sucks, but if you're going to conduct business there, you got to pay the price. You're going to need to get registered there and you will be subject to that $800 minimum annual fee.

Speaker 1:

All right, let's get into the critical question here of when am I required to register into another state? Well, the key consideration is are you conducting business in that state. Now for a rental property, it's quite simple. Do you have a rental property in that state that you rent to a tenant that's conducting business? That LLC needs to be registered in that state where the property is located and you're renting to the tenant? Simple okay.

Speaker 1:

If you're a business selling goods or services, okay, you're an operating business. Do you have employees or a storefront there? If so, you're going to need to register to conduct business. If you just have customers there and you don't have an active presence in that state, you don't need to register. But definitely if you have employees in that state or you have a storefront or an active office in that location, you will need to register your entity to do business in that state. Thanks everyone for listening. I hope this episode was helpful in understanding LLCs and how you can use them to your advantage. Now, if you want to get into the diagrams and some of the numbers I was writing down as I was going through this, get over to my YouTube channel, where these videos are as well. Thanks for listening. We'll see you next time and thank you everyone for listening.

Speaker 2:

A quick disclaimer and reminder this presentation does not constitute an attorney or CPA client relationship and it is always in your best interest to consult competent legal and tax professionals when conducting your own personal transactions.

Speaker 1:

We also want to make sure you know this is not investment advice or financial advice. We're just trying to give you education, ideas and strategies you can take to your professionals or conduct your own research on. We'll see you next time.

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Mark J. Kohler

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