Today's question comes from Raphael and he says, hi Marco, thanks for the great content you provide every week. I came across your podcast after listening to another real estate investing podcast. And I am getting a ton of value since I started listening six months or so ago. My question today is in regards to LLCs and how someone would pay themselves through an LLC. If all rental real estate is held in a limited liability company for optimal asset protection, here is a scenario say I become financially free today and quit my job. I own 20 rental units and have a total net cash flow of $6,000 per month. If my rentals are held in multiple LLCs, one per state that I am invested in, and all of those LLCs are held in a Wyoming LLC as a holding company.

How do I pay myself through those entities? I'm having a difficult time wrapping my head around that and would love to hear your thoughts and comments. Thanks for doing what you do. Raphael.





Thanks for the great question. It sounds complicated and I can totally understand how this can be a bit of a brain twister. I struggled with it for a number of years. Believe it or not, until I actually saw the light, I guess I saw through the matrix, but it's really pretty simple. So really the only LLC or entity that you are paying yourself through is your Wyoming, LLC. In other words, it's that top of the pyramid holding LLC, that you are actually a direct member in, you are not a member of the title, holding LLCs in each of the States that you have a property in. So what happens is, is you just think of this as a kind of a squashed pyramid.

You have these LLCs in the different States, that whole title to your property and the rental income that comes in from your properties flows into and through those LLCs. And those LLCs are owned by your Wyoming, LLC. So income and expenses are essentially shown in your books if you will, for each of those LLCs, but the income doesn't get paid to you or anyone else other than the member that owns that LLC. And in this case, that's your Wyoming, LLC. In other words, you're holding LLC. So the income just flows from the properties through those disregarded entities, those disregarded LLCs up into your Wyoming, LLC. And then from there, you can just pay yourself or you and your partner or you and your spouse or you and all your partners or whatever the case is. Whoever is the owner or owners of that Wyoming, LLC.

So the properties that are held in those LLCs for asset protection purposes are known as disregarded LLCs, also known as pass-through entities because income and expenses essentially just pass straight through and flow right up to the Wyoming LLC. So a disregarded LLC refers to an LLC that's owned by a single member, and this is the way the IRS looks at it. And the single member, in this case, is the Wyoming LLC that you have at the top of this pyramid unless a single-member LLC chooses otherwise, the IRS treats it as a sole proprietorship and it doesn't tax it. You know, this is the beauty and the simplicity of this instead profits from those LLCs flow through right on up to the holding LLC and that holding LLC in Wyoming in your case is the owner. And you can actually have multiple layers, but to keep it simple, this is the basic structure is what you just outlined in your question to me.

So that's really it at the end of the year, you or your tax professional will file a form 1065, I believe it is. And you will give yourself a form K1, a K1 statement from that Wyoming, LLC. And then you just report whatever's on that K1 statement for income and expenses and whatever else you have coming out of that, LLC, to you on your personal tax return. So you are paying yourself monies flow from your properties on up through the title, holding LLC to your Wyoming, LLC, which is your holding company. And then you just pay yourself from that one entity and from an asset protection perspective, you really own one LLC,