Business Management

6 Mistakes to Avoid When Setting Up Your Real Estate Entity

Expertise: Business Management, Commercial Real Estate, Landlording & Rental Properties, Real Estate Deal Analysis & Advice, Mortgages & Creative Financing, Personal Development, Real Estate Investing Basics
126 Articles Written

I’ve set up about 20 entities in my entrepreneurial career, and many of them early on can best be described as “experiments.” I didn’t really know what I was doing, and I made all kinds of mistakes, ranging from hiring an attorney when I should have done it myself to doing it myself when I should have hired an attorney.

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I’d like to see if I can help spare you some of the aggravation of having to figure this out from scratch.

Here are 6 pitfalls to avoid when setting up your real estate entity.

6 Mistakes to Avoid When Setting Up Your Real Estate Entity

Mistake #1: Not Educating Yourself About the Pros and Cons of Different Entities

In many cases, setting up an LLC will do just fine for real estate investing.

But not in ALL cases.

Do you know the pros and cons of LLCs, C-Corps, S-Corps, LPs, or LLLPs? No?

Well, you should.

Because not every situation is the same.

Maybe you’re the sole owner in your business for the foreseeable future. Or perhaps you want to create an entity that includes different investors. Or that can own multiple other entities. Or that will have employees and provide maximum tax savings and benefits.

Related: 9 Steps to Take BEFORE Setting Up a Real Estate Investing Business Entity

Each of these situations and objectives may require a different entity.


Mistake #2: Not Setting up the Entity From Day One

Should you set up the entity now even though you haven’t done a deal yet?

My answer is YES. You should set up your umbrella real estate investing entity now. Here’s why:

  • You can reduce your taxable income IMMEDIATELY with any business-related expenses.
  • You get the benefits of asset protection from day one.
  • You look more professional if you’re acting as a business.

For these three reasons alone, it’s worth setting up your entity immediately. It’s cheap and easy to do if you know how.

Mistake #3: Not Maintaining the Entity

Most real estate investors who set up an entity fail to properly maintain the entity.

“Huh, you mean I need to do something to maintain the entity?”

Yup. You need to do things like have an annual meeting with minutes (even if it’s only with yourself) and document major decisions (like buying or selling a house) with resolutions (even if they’re only signed by you). Also, make sure you don’t do things like co-mingle business with personal funds, and make sure you sign documents as an officer of the company.

This is important to maintain the corporate shield that your entity provides to you. Otherwise, if you don’t and you ever get sued, it’s possible that the “corporate veil” can be pierced and you become personally liable (that’s very bad).

Mistake #4: Not Setting Up the Entity Yourself

Don’t pay an attorney $1,200 to set up a single member LLC. Buy a course or book that shows you how, and do it yourself. Keep your operating agreement to just a few pages.

Keep it simple.


Mistake #5: Not Knowing When to Hire a Professional

Having just said that, the opposite is also true. Don’t try to set up the entity yourself when an attorney should really do it for you. This gets back to mistake #1, not knowing about the different kinds of entities, what’s involved, and when to hire a professional.

For example, if you’re going to do something a bit more complex (like have investors in the deal), definitely have the attorney involved in crafting the operating agreement.

Mistake #6: Setting Up the Entity Too Early

If your plan is to purchase apartment buildings, for example, you'll most likely want to have each property in its own entity. Many newbie multifamily investors make the mistake of forming "123 Main Street LLC" too early, and then the deal never goes to closing.

Time and money are wasted.

Instead, sign a contract with "Entity TBD" or "Your LLC Name or Assigns." When you're done with due diligence and you're sure you're going to move forward, THEN have the attorney create the LLC.


The first step in avoiding mistakes when setting up your entity is to educate yourself about the pros and cons of the different entities.

Related: 2 Entity Structures That Are Not Wise for Real Estate

To learn the pros and cons of various different entities for real estate investing and step by step instructions for setting up and maintaining the right entity, educate yourself (it’s not expensive).

Here are a couple of resources that may be helpful:

  • John Hyre’s course on entity selection. I recently acquired it and wrote a review on it. The course is very affordable and has excellent content. I just wish John would put out an update. 🙂
  • And/or get the NOLO book Your Limited Liability Company on Amazon to help you maintain the LLC.

In most cases, you can set up the entity yourself, and if it’s more complicated, you’ll know when to hire a competent attorney to help you.

What kind of mistakes did YOU make when setting up your entity? Any other advice?

Leave your comments below!

Michael Blank is a leading authority on apartment building investing in the United States. He’s passionate about helping others become financially free in 3-5 years by investing in apartment buildi...
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    Curt Smith Rental Property Investor from Clarkston, GA
    Replied over 4 years ago
    I completely agree but I recommend that every entity is created by an attorney because it’s the operating agreement that is the most important thing without a well-crafted operating agreement The Entity May be almost of no value. +/- for example the operating agreement should mention what happens in the case of your death or the death of a partner which hooks in the issue of your will supersedes whatever is in the operating agreement. Lol I just hooked in estate planning as well which involves use of possibly trusts and certainly entities.
    Matthew Kreitzer Attorney from Winchester, Virginia
    Replied over 4 years ago
    There are some worthwhile tips for people just starting out in this article, but I must respectfully disagree with at least one of those tips; do not hire an attorney “unless necessary”. I would caution to always hire an attorney, as a non-attorney does not know when it “isn’t necessary”. I do not say this as a self-interested party, as my general practice area is not Business Incorporation. Unfortunately, that area of practice is a loss leader due to websites pushing the “cheap and easy LLC”. I will say that there are a bunch of legal pitfalls associated with attempting to set up your own LLC. There are more reasons to hire an attorney to help you than simply to “fill out paperwork”. Although I will note that people who set up their own Articles of Incorporation often leave out important clauses that major websites fail to notify them of. Among those reasons include; a proper education on compliance issues such as accounting methods, segregation of assets, general operational guidelines, and many more. Failure to have an attorney adequately advise you on how to maintain your LLC status will prevent future judgment creditors from “breaching the corporate veil”. Setting up a business entity is a legal matter. As such, you should not accept advice on its formation from non-attorneys. Find a local, licensed attorney to help guide you through the process, or risk an evil Creditor’s Attorney, like myself, making you wish you had invested that start up capital wisely. There are dozens of methods available to a wise Creditor’s attorney to get at your personal assets. If you want to get into real estate investments, do yourself a favor a make friends with; a CPA, an attorney, and an insurance broker. Disclaimer: This is not legal advice, but basic educational information. If you have legal questions, find a local attorney.
    Jerry W. Investor from Thermopolis, Wyoming
    Replied over 4 years ago
    Very good article. There are some good courses out there and I also recommend that most of my clients buy a corporate book with some premade forms to help them do their annual meetings. Getting the right entity is a big deal, I have them get advice on that from their accountant. I am also at a loss as to why we have so few closely held LLCs or Sub S corporations, they are definitely easier to maintain.
    Replied over 4 years ago
    Great info. on LLc, thanks for sharing Michael!
    Mecca Walker from Springfield, MO
    Replied about 4 years ago
    First, thank you for publishing this article! From a beginner/intermediate’s standpoint, it’s extremely helpful. Nonetheless, you did mention each multifamily property should have it’s own entity. Is there supposed to be an umbrella entity overseeing the singular properties or is leaving them separate entirely okay??
    Curt Smith Rental Property Investor from Clarkston, GA
    Replied almost 2 years ago
    @Mecca, my view is there’s no Must do re stacking LLCs. Its per ones business strategy OR common ownership via one tax return filing entity at the top, vs filing tax returns at each commercial (MF) entity which I feel is more commen. Commercial LLCs / operating agreemetns are almost always multimember due to needing cash partners to fund the larger deal. So there’s no common upper level ownership. The commercial multi member LLCs often are pass through so file a 1065 partners return and each member gets a K-1 onto their personal 1040. LLCs taxed as S-corps of course file 1120s and K-1s to the members as well. Typical is: you are a member in a multimember MF/commercial LLC, you have your own single member LLC that owners or controls rentals which are typically owned by just you, rarely jointly, and you also have LLCs that are taxed as S-corp for flipping etc active income business. Commonly / Typically you’d have a few LLCs all horizontal you are members of or own. Stacking is rare and incures hassel, expense and needs to be for an important reason to pay for the extra hassel and possible expenses.
    Bo Wagner Attorney from Brookhaven, GA
    Replied almost 2 years ago
    Wow, maybe I should be charging much more for LLC creation! $1200??? Not so much. Regardless, there are pitfalls to using ‘online’ forms or cheap websites, etc. for documents. As noted by others, creating the LLC is the simple part (online w/State of GA is $100) BUT there are more things to worry about. As also noted ‘somewhat’ get your ducks in a row first–don’t create the LLC then go after the Operating Agreement; try to get someone to do it all for you. Too much to type on this but great article!
    Curt Smith Rental Property Investor from Clarkston, GA
    Replied almost 2 years ago
    @Bo, completely agree hire an attorney to create the LLC AND operating agreement. I pay/paid $695. And am glad to have an Attorney as the registered agent and not “some dumb amateur who screwed things up, and now has an almost worthless entity”. 🙂 Also my pre paid legal service, Legal Sheild offers creating LLCs for $145 (discounted rate via my local REIA). I’ve never used this avenue but others have. #3 is bigger then most give credit. Mis managing the LLC, not getting a bank account on the EIN, or co-mingling personal and business funds etc etc. I’m different then most REI’ers, I perfer multi-member LLCs not just for Charging Order protection, mainly so I can file a 1065 partner return, pulling all that Sched E, Sched C activity OFF my personal 1040!!!!! The partner return is a very useful audit risk reduction strategy. As is filing with the IRS that an LLC is to be taxed as an S-corp, which is useful for flipping, wholesaling OR property management, pulling that activity off the personal 1040 and gaining tax advantages through business deductions etc. So much to get into here, but this list was useful teasers of important topics! Tnx.
    Curt Smith Rental Property Investor from Clarkston, GA
    Replied almost 2 years ago
    BTW I need to apologize to DIYers who may be very knowledgeable creating their own LLCs, I used way too strongly worded comment re a non-Attorney being the registered agent. Many folks creating their own LLCs do know what they are doing and I shouldn’t have used “dumb” etc above. What I do feel is true regardless of the skill of the DIY’er is that the perception that there’s liability containment value in an LLC is (in my view) eroded when #3 is infringed upon and/or a personal name is the registered agent. Attorneys have told me that a personal name as the registered agent is not a guarantee but its a step toward “easy pickings”. But thankfully law suits are rare and so many LLCs are just used to borrow hard money on flip deals so liability containment is not the desired purpose of the LLC anyway. Useful read re piercing the corp veil: