This structure provided the asset protection for John and Sarah and segregated liabilities between the properties.  However, it created a need for four additional bank accounts, EIN numbers and partnership tax returns. In addition to the extra expenses to maintain and file returns for each LLC, the paperwork and accounting were proving to be burdensome as well.

The better way to structure this is to have John and Sarah both own one multi-member LLC that in turn owns single-member LLCs that then own the properties.

This would segregate the liabilities for each property from the other properties. And, since the single member LLCs are disregarded for tax purposes, only a consolidated partnership return for the multi-member LLC is required. It would also provide charging order protection should John or Sarah get a judgment against themselves personally. But John was tired of the extra tax returns and wanted to simplify even more.

He proposed to set up five single-member LLCs, one to hold each property. He would own two of the single-member LLCs and Sarah would own three. In this structure, John certainly simplified the paperwork and tax reporting. All income and expenses would now go on their joint personal tax return. While this structure is better than owning the properties directly, four points should be made.

1. John and Sarah potentially lose charging order protection that the multi-member LLC provides since each own separate LLCs (no innocent third party). This is a significant consideration since the houses are almost paid off and therefore attractive targets for any judgment holder against either or both of them personally.  (Some form of equity stripping should also be considered.)

2. A liability occurring on one of the properties should be stopped from affecting the owner of the LLC that owns the property. However, with a single entity layer, opposing counsel will probably investigate whether the liability shield was respected by the owner.  In other words, was the entity treated as separate from its owner?

3. John and Sarah lose the low audit profile of the multi- member LLC’s separate tax return. This partnership return would net all income and all expenses, passing these net numbers on to the members’ personal return for the taxes to be paid. While there would be no extra taxes to pay, there would be the cost of the extra informational return.

4. To take maximum advantage of estate tax exclusions, Sarah and John must try to equal the equities in the properties.  This should be revisited each time a
   property is purchased or sold.