Are you one of millions of Americans who have added owning Residential Rentals to your “retirement package?” Many folks took advantage of the temporary drop in home prices back in 2009ish and purchased at least one, but usually more than one property.
So let me ask you a question? What have you done to protect all your assets from a lawsuit if a tenant in one of your properties sues you? There is a simple solution. It’s called an LLC. That stands for “Limited Liability Company.” When a property is owned by an LLC, then any lawsuit damages are usually limited to just that property.
Part of using an LLC structure is to have a separate bank account for each one, which makes it easier to track income and expenses for income tax purposes. Speaking of income tax, putting a rental into an LLC doesn’t change how it is taxed on your personal income tax return. All is still reported by each rental on Schedule E.
So getting to the question I asked to begin with, “Why should I care about a Series LLC?” It’s quite simple actually. If you do have more than one rental, putting each rental in its own LLC limits the liability for damages to just that one property.
Did you know that the Nevada Secretary of State (and all other states too) charge an annual fee for each LLC you setup? (In Nevada, it’s $350 per LLC.) Well using a special designation, you can bundle all the LLCs into one account, called a “Series LLC” and only pay one fee for annual licensing. How about that for savings?
The steps in forming a Series LLC (also known as SLLC), are as follows: 1) You need to file Articles of Organization, indicating that there are plans to have “subset LLCs”. 2) There should also be an Operating Agreement detailing guidelines for the operations of the Master SLLC and then, 3) Create subsequent Operating Agreements for each subset entity under the Master.
But Kelly! I already have a bunch of individual LLCs. How to I convert them to an SLLC arrangement?
In general, you must file an amendment to the Articles of Organization stating the conversion from an LLC to a series LLC. A new series LLC Operating Agreement also needs to be prepared indicating how the master LLC will be managed. FYI. It is important that your master LLC have a name that ends with “…SLLC”. Example: “Kelly’s Master, SLLC” as opposed to a regular LLC like, “Kelly’s Sub1, LLC”.
If there is more than one owner, then there will be a need to file an annual Partnership Income Tax Return, Form 1065 for the SLLC only. (Roll up all the subset LLCs into the master SLLC totals.) That produces a “schedule K-1” (like a W-2 form for partners) that passes income to your personal tax return. If you’re the only owner, the Series LLC is reported as just one property on Schedule E of your personal tax return.
Did you hear? Proverbs 2:11 says, “…discretion will watch over you, understanding will guard you…”
Kelly Bullis is a Certified Public Accountant in Carson City. Contact him at 882-4459.