There is so much conversation on LLCs—from the basic stuff, such as what are they and why we should use them, to more complex topics like which state we should register in and the difference between a manager-managed LLC and a member-managed LLC.
Here I am going to take a stab at one of the questions that I hear a lot: Should you get a new LLC every time you buy a property?
There are pros and cons for doing this, and below, I go over them in detail.
Pros of Using a New LLC Every Deal
- Ownership structure: Perhaps you are working with several different owners on a new deal. It makes sense to have a new LLC, as it will define the ownership percentages and the roles of each owner.
- Working in a new state: This could be argued either way, but to me, it makes sense to incorporate in the state where your investment property is.
- Doing a flip: Many investors do a new LLC every flip. This makes sense, as it separates that flip from other properties with respect to taxes and liability. More on this in the video above.
- Asset protection: Holding each purchase in its own LLC will compartmentalize each property from the other. If there is a liability claim with one property, it won’t affect any others held by you. Some would say that this is the main reason to hold each deal individually. Watch the video for a deeper conversation on how valid this is.
Cons of Using a New LLC Every Deal
- Higher costs: You will pay a fee to set up each LLC and, in most states, another fee to file a return every year and a fee to your CPA.
- Growing portfolio: Depending on the size of your portfolio, it might be easier to get a loan if you lump several properties into one LLC. Holding each property individually could make it harder to get financing, especially if the values are less than $100K.
- Insurance: You can obtain a reasonably sized general liability policy on your properties and arguably have the same level of asset protection as you would if you held each address individually.
I go into way more detail on everything in the video above, so be sure to check it out.
I know there are schools of thought on both sides of this conversation, and I would like to hear from both.
If you are a strong advocate for either, please leave a comment below!