Jjb Property Management
Jjb Property Management – This article discusses several different business structures, including formal entities and non-entities, that can be used by real estate investors and other investors. This list is not exhaustive, but covers many of the most common scenarios for small businesses.
But first, a quick note on vocabulary: Pay close attention to the words “partner” and “partnership.” They are very specific legal terms of art that span centuries of law and legal theory. In addition, there are numerous different partnerships; but the main differences are between general partnerships and limited partnerships. Not everyone is created equal. For example, this firm rarely or never recommends a limited partnership structure, but this firm often recommends a limited partnership structure. Further, a general partner means something different from a general partnership; same with limited partnership and limited partnership.
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This is the default business structure if you run a business yourself without forming an entity. Many people use the slang term: “sole support leg” to refer to this structure. If you are self-employed, you are called the “owner” of the business. Note that it is not a formal entity. Its advantages include no additional tax declaration, no legal costs for forming an entity. The disadvantages include no liability coverage of any kind, your personal non-business assets are completely exposed and may actually end up costing more in the long run if you are sued.
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A limited liability company is similar to a sole proprietorship in that it is created by default without the need for other actions to start its existence than starting a business with two or more people. There must be two or more people to form a professional company. A joint venture is a general partnership limited to one real estate transaction. Pros are Subchapter K taxation, flow through taxation, great administrative flexibility, can be affordable if you are ok with rolling the dice on default laws (you should NOT be ok), no filing fee to the government, no securities, Cons are unlimited personal liability for your actions AND unlimited personal liability ( i.e. you) from the actions of all your partners (yes, you read that right, your partner can incur liability that you have to pay for), partners can’t be paid as a W2 employee, file a tax return, and other cons.
Often you will see an investment club that is structured as a public limited company in order to get around many of the other securities regulatory issues involved. Investment company law questions aside, you’re much better off encapsulating such a structure inside a member-managed LLC for liability protection.
In this structure, we see the first layer of real liability protection for owners. You can have one or more “members”, you can choose how you want to be taxed (see the box tax article), you have a lot of flexibility in management (you can choose a management structure such as a traditional public company, a limited partnership, a limited company, or any combination of the above), and have strong protection against creditors under TX law.
For non-real estate businesses, this is sometimes all you need. However, for real estate (other than trust companies), if you want to own more than one property and own them all in one LLC, you’re putting all your eggs (assets) in one basket.
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For example, let’s say you own three single-family homes (Properties A, B, and C) under ABC Investments, LLC. The tenant slips and falls due to the hidden situation in property A. The plaintiff sues you and wins a very large judgment. The plaintiff’s attorney can handle all three properties. However, if the properties were divided into sections, they would be less likely to be subject to slips and falls.
Conclusion: sometimes recommended for certain non-real estate businesses (management companies are an exception), and better than nothing for real estate business, but prefer other structures in real estate business
Series LLC is a relatively new invention in the area of LLC. It allows a single LLC to operate under individual parts of the LLC called a “Series.” If the proper formalities are followed, the assets and liabilities of each series must remain separate from the other series of the LLC and from the LLC as a whole. The main advantage of a series LLC is the ability to keep multiple packages separate from each other.
Look at the diagram (you can click on the image to enlarge it). The three Doe’s are owners (personally) as owners of JJB Investments, LLC. There are then three series under the LLC that separate Real Properties 1-3.
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Benefits include better liability protection, only one filing fee to the government, typically only one tax return, management flexibility, and all the other benefits of a traditional LLC. Disadvantages include increased bookkeeping, not well tested in courts due to their newness, may be better for other LLCs to perform other duties, more paperwork for each series, assumed certificates of title for each series, and real estate records for series need custom language to show ownership of a specific series unlike an LLC: n as a whole.
Despite all their disadvantages, their advantages are significant. Limited companies are growing in importance and should be on the radar of all investors, not just real estate investors.
Now we are in our recommended structure for many different companies, especially those companies that are capital intensive. See the diagram (click to enlarge). You will notice that the three Doe owners each own two companies; but note that the companies do not own each other. Here’s a quick explanation of how they work:
The holding company is formed as a TX series LLC. It has title to various assets such as real estate and equipment. However, it does not have any activity with external third parties. That’s where another LLC comes into play: it takes possession of the property, but not the title. The operating company then uses the property and interacts with third parties, tenants, contractors, and so on. In the diagram, JJB Operations would enter into an agreement with each series separately for the control, but not the ownership, of the respective property owned by each series.
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The operating company is never intended to own significant assets. We sometimes call these “shell companies” because there isn’t much inside. The operating company is meant to be subject to all lawsuits (ideally, third parties don’t even know the holding company exists) and if you sue and lose (or if the costs of defending a lawsuit are huge), you can divest the shell company and start a new shell company.
The holding company is relatively protected because it never entered into an agreement with the plaintiff. Additionally, using optional asset stripping techniques, we can make an operating company (and even a holding company) look like a bad asset and less attractive to a lawsuit very easily for equipment assets and fairly easily for real estate assets.
Bottom line: this is our bread and butter arrangement for most business structures, including real estate. However, more advanced structures are available
This structure is for the small business owner whose small business empire spans a wide variety of businesses and wants to simplify perhaps several separate operating structures. Let’s look at the chart.
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We can immediately see that we have the main Holdings series LLC owned by the three members of Doe LLC and managed by the trust. The trust is a new wrinkle that adds anonymity in that in TX, a director-managed LLC typically only discloses the names of its directors, rather than members, on the certificate of incorporation. This keeps members’ personal names out of public records until the first public information report is ordered. If the foundation is also a 100% member, only the name of the foundation is disclosed as the owner.
We see a real estate company operating in Series “A” and “B” of Holdings along with JJB Capital, LLC and JJB RE Operations, LLC. This is just our previous two-company structure, owned by the parent company instead of people. The Holdings company also has a hand in other business ventures.
Autoliike shows another two-company structure, but this time with outside investors, so there is a sub-holding company.
The beauty of this structure is that many of these companies are disregarded entities and flow through their income to the Holdings company, reducing the number of tax returns required. We will likely have a tax return at the Holdings company level, the JJB Car Dealership LLC level, and possibly the trust level. If this was set up as individual LLCs for everything, we would potentially have over 9 tax returns.
What Is Product Data Management (pdm)?
It can look terribly complicated in diagram form; but it’s actually simpler than running each business as separate LLCs.
Trusts are also a valid way to own real estate, however, TX trusts do not have liability protection. So they are typically used for anonymity and also for regulatory compliance
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