Pure LLC Holding Company

By Jason Watson, CPA
Posted Saturday, September 7, 2024

The previous section was about holding companies versus operating companies, but this particular LLC holding company variant does not have any commercial activity. It is purely a holding company. While this might not be 100% germane to the rental property discussion, it certainly could be used for holding other real estate investments such as syndication interests. What are we talking about here?

Let’s say two people want to own an airplane which is way more fun than some real estate syndication. They could title it in their own names such as Buzz Aldrin and Amelia Earhart JTWROS. The fancy JTWROS is joint tenancy with rights of survivorship. This means that should Amelia die before Buzz, typically Buzz would absorb her interest in the airplane.

Time moves along, and Buzz and Amelia want to bring in Pete Mitchell as a third owner. They could add Maverick to the title because no one really knows who Pete Mitchell is, but this gets a bit cumbersome. If you add financing with personal loan guarantees to the mix, it could get messy if the bank wants to re-write the loan docs to add Pete… err… Maverick.

Rather, Buzz and Amelia would create a multi-member limited liability company (MMLLC) called The Little Red Bus LLC. This entity would hold title to the airplane but it would not have any commercial activity. The LLCs’s Operating Agreement would dictate how members could come and go, what happens if one member passes away, and other entity governance items. Therefore, when Pete Mitchell wants to be a part-owner, he would simply acquire member interest in the LLC. Title would not change since The Little Red Bus LLC owns the airplane, and Buzz, Amelia and Maverick own the LLC. Loan documents would not change, but perhaps an additional personal guarantee would be required.

LLCs are being used more and more in non-commercial or non-operating environments to make transfer of ownership super easy. We see this with boats, exotic car collections, art, investments, among other things. Also, since there is no commercial activity, a tax return would not be required. Yes, an EIN would be necessary for a business banking account, but that in itself does not trigger a tax return filing requirement.