What are the pro’s and con’s of multiple LLCs?
Let’s start with the cons first.
The most obvious con of multiple LLCs is cost.
It costs money to form your LLC, and some states charge an annual fee (such as California’s $800 franchise tax on LLCs and other entities) for each LLC.
There is also a con in the sense of additional administrative work, particularly at tax time.
Every multi-member LLC must either file a Form 1065 annually (for those taxed as partnerships) or a Form 1120 (for LLCs taxed as corporations).
Then, each multi-member LLC must issue K-1s to all the members.
So, if you have multiple LLCs, you’re going to have multiple tax filings and K-1s flying around.
The biggest pro of having multiple LLCs is the liability protection.
This is particularly the case with real estate.
We have clients that are commercial developers, and every new development is a separate LLC. Often times, each phase of the development will be a separate LLC, as will there be separate LLCs for the commercial and residential portions in a mixed-use, planned community (such as new-urbanism communities).
The reason for separating your real estate into separate LLCs is so if there is a problem with one piece of property, the liabilities caused by the property don’t affect your other assets.
We’re not talking only about the proverbial “slip and fall” case. While the prospect of someone falling and injuring themselves on your property is a common concern portrayed by the media, one of the biggest risks to owning property is environmental.
Environmental cleanup costs can often exceed the value of the particular piece of property. And you don’t have to be at fault to be liable for cleanups–if there is contamination at your property, the government will hold the owner responsible. If someone else caused the problem (such as a “midnight dumper”), then you are free to pursue them. But in the meantime, the government expects you to pay.
If all your properties are owned in a single LLC, then a problem at one of them can wipe out your equity in all the rest.
The worst situation is to own real estate in your own name. (other than your personal residence. The second worst is to own all your real estate in one entity.