Should I create an LLC?

Question

I have seen that many of you have an LLC. What are the benefits to a landlord that only has one property.

Should I create one?

Mark Saenz · Answer

Hey Charley,
  That's a good question and it's a question a lot of people have.  The correct answer is actually going to depend on your specific situation and your future intentions.  FOr example, are you planning on buying more?  Are you going to rent or possibly fix and flip etc.  Also, you may be using entity structure for privacy, tax planning, asset protection, etc....  so again it depends on what you are trying to do.  I would sit down with your atty or cpa, possibly both...make sure they know what you want to do, and then have them advise you on the best answer for you.  You make the final decison, but your team is a huge asset to your business.

BTW, I am glad you mentioned insurance, most people don't even consider this in their planning....  when I meet with my team (at least quarterly) it's my CPA, Lawyer, and Insurance agent.  That is another great piece especially as you grow.  Lately, it seems our world is becoming a lot more litigous with all the wrongful foreclosure stuff going around etc. so you bet we are making our insurance policy a big part of our business planning.  Hope that helped and good liuck.

Ebere Okoye · Answer

Ok, you get the advantage of hearing from a CPA to Real Estate Investors on this forum. Here are my two cents. I usually advice my clients to form entities based on three factors - legal protection, tax reduction, compliance.  You have already noted the difficulty of finding one that meets all three criteria.  Right now, the best one I see out there to use is the MULTI-member LLC with a GOOD COMPREHENSIVE OPERATING AGREEMENT/UMBRELLA POLICY.  While I cannot exhaust this conversation on this forum, I will highlight the main advantages.

1.  LLC's have the least compliance requirements. no minutes, BOD meetings, even no formal agreement but I strongly suggest using a comprehensive operating agreement. I currently use a 121 page one for my clients.

2.  Multi-member LLC's can help in asset protection by dealing with bottom up creditors (has a claim and/or gets a judgment against the LLC arising from the acts or omissions of the company rather than from the acts or omissions of a member, manager or employee)
as well as top down creditors (gets a judgment against the member because of the member's acts or omissions, rather than the acts or omissions of the LLC, its managers or employees). With a good operating agreement and an umbrella insurance policy, you can minimize(NOT MITIGATE) your exposure.

3. Multi-member LLC's can help with the reduction of IRS audit exposure since 8825(rental property form for a partnership) is audited a lot less than a schedule e(rental property form for an individual/sole propriertorship)

So while you may not have all the asset protection you want, A good multi-member LLC with a carefully drafted operating agreement and an umbrella insurance policy, is the best shot out there for a Landlord

Mitch Kronowit · Answer

Nevada LLC's are for businesses in Nevada. If you're going to flip or hold property in another state, you're going to have to register your Nevada LLC with the Secretary of State's office in the state your property is in, and pay all the taxes and fees as if your LLC were formed there.

Doesn't make sense to virtually do things twice.

EMon Mitchell · Answer

I just formed an LLC here in NC and was surprised at how easy it was, esp. getting the Tax ID # from the IRS (10 minutes & I had it). I hear Nevada is the best place to set yourself up, but it depends on the taxes where you're located.

Charley F. · Answer

Thank you!

Mark Saenz · Answer

"I'll need to find a CPA to tell me more about it, as of now, I have done things only by extensive research, now with the support of this terrific site. :)"

Good idea...most of these guys will give you that sort of advice for free...over a call.  Just interview them and tell them you are looking for a local CPA.  IF you are going to make a business out it (which it sounds like you are) then you're gonna want to have a guy/gal like that around anyway...  best of luck Amigo!

Mark

J Scott · Answer

This is true of an LLC if it hasn't elected to be taxed as another type of entity.  The nice thing about LLCs is that they can elect to be taxed as a partnership, an s-corp, a c-corp, etc -- basically whichever tax structure is of the most benefit.

Most people that start LLCs (and talk to a good CPA) will elect to have their LLCs taxed as another type of entity, and there *will* be potential tax advantages.

Charley F. · Answer

Thanks Mitch.

Mark, my goals for now are buy and hold and if the circumstances allow it, I plan to get one property per year for a few years.

I'll need to find a CPA to tell me more about it, as of now, I have done things only by extensive research, now with the support of this terrific site. :)

Mitch Kronowit · Answer

Pretty much, yes.

Charley F. · Answer

Thanks for the advice. Before I found this site I research on the benefit and most people agreed that it didn't had much advantage, that all you needed was a proper insurance coverage.

I had the same privacy concern but I realized that, if the tenant is a bit tech savvy he would be able to find info about the owners online. Nonetheless instead of an LLC I created a Sole-proprietorship and work under a business name.

Scott, as far as I understand it as a sole-proprietorship I have the same tax advantages as an LLC. I am incorrect?