{"id":186368,"date":"2025-12-26T07:09:23","date_gmt":"2025-12-26T14:09:23","guid":{"rendered":"https:\/\/www.biggerpockets.com\/blog\/?p=186368"},"modified":"2026-01-05T07:10:24","modified_gmt":"2026-01-05T14:10:24","slug":"why-even-small-investors-might-still-want-to-consider-an-llc","status":"publish","type":"post","link":"https:\/\/www.biggerpockets.com\/blog\/why-even-small-investors-might-still-want-to-consider-an-llc","title":{"rendered":"Why Even Small Investors Might Still Want to Consider an LLC"},"content":{"rendered":"\n

This article is presented by <\/span>LegalZoom<\/span><\/a>.<\/span><\/em><\/p>\n\n\n\n

A frequently asked question in online real estate investing threads is, \u201cShould I form an LLC for my rental property?\u201d <\/span><\/p>\n\n\n\n

It may seem like setting up an <\/span>LLC<\/span><\/a> is one more thing <\/span>to do<\/span> on a list that can <\/span>seem<\/span> so long to a new investor that it\u2019s overwhelming.<\/span> There\u2019s insurance to research and sort out; there\u2019s the property management company, the rental payments, the accounting\u2026<\/span>is<\/span> setting up an LLC<\/span><\/a> really worth it if you\u2019re investing on a small scale, say, into a single unit, at this point? <\/span>Isn\u2019t it enough to <\/span>just<\/span> purchase good insurance?<\/span><\/p>\n\n\n\n

As a matter of fact, you <\/span>really, really<\/span> should set up an LLC for your rental.<\/span> New investors often don\u2019t realize that buying rental property in their personal name exposes them to lawsuits, tenant claims, and debt collection. An LLC separates personal and business assets, creating a liability firewall. <\/span><\/p>\n\n\n\n

Let\u2019s consider all the implications in a bit more detail.<\/span><\/p>\n\n\n\n

What a Lawsuit Could Mean If the Property Is in Your Name<\/span><\/h2>\n\n\n\n

From a legal perspective, becoming a real estate investor is a higher risk, for the simple reason that you will be dealing with <\/span>a lot<\/span><\/em> of people and situations that can lead to a lawsuit. <\/span>The most obvious risk comes from tenants, who could sue you for anything from slipping <\/span>and falling<\/span> on an icy driveway (which <\/span>is your responsibility to maintain<\/span>) to mold in the bathroom.<\/span> <\/span><\/p>\n\n\n\n

But risks don\u2019t stop with the tenants. The neighbors could sue you for accidental damage to their property (say, a fence) during repair or renovation work on your property. They might even sue you if a new <\/span>fence<\/span> (or tree) accidentally crosses the property boundary onto theirs. <\/span><\/p>\n\n\n\n

A lawsuit, if it does happen, is always a headache, but if the rental property is in your own name <\/span>and not under<\/span> an LLC, you could be looking at a true nightmare. <\/span><\/p>\n\n\n\n

The <\/span>biggest<\/span> risk of not forming an LLC for your rental investment is exposing your personal assets to claims. <\/span>If you <\/span>personally<\/span> are being sued, you could lose your <\/span>personal<\/span> savings and even your <\/span>own<\/span> home.<\/span> Depending on the size of your personal assets, your landlord liability insurance policy may not cover all of it.<\/span><\/p>\n\n\n\n

Even more unpleasantly, if you <\/span>happen to<\/span> go through a divorce<\/span>, <\/span>if<\/span> your real estate <\/span>property<\/span> is in your own <\/span>personal<\/span> name, it\u2019s considered your personal property and can become part of the divorce settlement, just like the house you share with a spouse.<\/span><\/p>\n\n\n\n

How LLCs Isolate Rental Risk<\/span><\/h2>\n\n\n\n

These are just some of the potential scenarios in which an investor can suffer because <\/span>of their failure<\/span> to separate their business and personal assets. Setting up an LLC does just that: In the eyes of the law, it creates a clear separation between business and personal assets. It\u2019s a metaphorical wall between your personal life and business life. <\/span><\/p>\n\n\n\n

If a court determines that you must pay damages, only your business assets would be at stake. Legally, claimants and\/or creditors cannot go after your personal assets. <\/span><\/p>\n\n\n\n

Say a tenant decided to sue for an accident in your rental unit. If the rental <\/span>is registered<\/span> as an LLC, the maximum they could sue you for are the assets held in the LLC (worst-case scenario, that includes the value of the rental property). But they cannot then also go after your personal savings, car, etc. <\/span>The liability is limited by the size of your business<\/span>.<\/span><\/p>\n\n\n\n

This<\/span>, of course, doesn\u2019t mean that setting up an LLC protects you from the possibility of lawsuits\u2014the meaning of \u201cLimited Liability\u201d is sometimes misunderstood in this way. All it means is that your liability stops at your business assets; the business can still <\/span>be sued<\/span>, and, if the claimant has a case, they can win. <\/span><\/p>\n\n\n\n

Common Mistakes First-Timers Make<\/span><\/h2>\n\n\n\n

If you have already bought your first investment property (the traditional route with a mortgage, not cash buyer) and are now reading this and thinking, \u201cgreat! Now I\u2019ll form an LLC!\u201d you need to tread very carefully. <\/span><\/p>\n\n\n\n

Forming an LLC after closing on a property technically triggers what\u2019s called the \u201cDue on Sale\u201d clause, where the mortgage lender can demand full loan repayment due on the transfer of ownership. Your lender may not do this, but they certainly can. You should always form an LLC <\/span>before <\/span><\/em>you close and sign the deeds on the rental property. <\/span><\/p>\n\n\n\n

Having said that, there still are ways to incorporate the property into an LLC, but it will need to go through a land trust first. If you already own property and want it to become part of an LLC, you\u2019ll need legal advice first. <\/span><\/p>\n\n\n\n

Newbie investors often dislike the administrative work (especially come tax filing time!) of running a separate LLC, so they sometimes incorporate multiple properties into one LLC. <\/span>This<\/span> can seem like an efficient way <\/span>of running<\/span> things, but it is a <\/span>mistake from a<\/span> legal <\/span>standpoint<\/span>.<\/span> If a lawsuit does happen and all your properties are part of the same LLCs, they are now all on the line. <\/span>You should always isolate <\/span>the<\/span> liabilities for multiple properties<\/span>, <\/span>incorporating each into its own LLC.<\/span><\/p>\n\n\n\n

Another common mistake first-timers make with LLCs is <\/span>that they don\u2019t<\/span> keep personal and business finances separate. <\/span>This<\/span> is known as \u201cpiercing the corporate veil\u201d and essentially negates any protection offered by the LLC. If, for example, during a lawsuit, <\/span>it\u2019s discovered<\/span> that you were using your <\/span>LLC bank account<\/span><\/a> for personal expenses, the court can determine that <\/span>you can still be held<\/span> personally responsible. <\/span><\/p>\n\n\n\n

Finally, holding rental property in an LLC can <\/span>place restrictions on<\/span> financing future properties.<\/span> Fannie Mac and Freddie Mac, for example, will not lend to LLCs, so if you want to finance an investment property through them, you\u2019ll have to do it in your own name. <\/span><\/p>\n\n\n\n

Final Thoughts<\/span><\/h2>\n\n\n\n

LLCs are not a panacea, but for most investors, they do offer very real asset protections and are well worth the extra time, paperwork, and small fees involved. <\/span><\/p>\n\n\n\n

If you want to make sure your rental investment LLC is set up correctly from the get-go, <\/span>get in touch with<\/span> us at <\/span>LegalZoom<\/span><\/a>. We can help with everything from timing the formation of your LLC to paperwork and any individual complexities of your real estate business.<\/span><\/p>\n","protected":false},"excerpt":{"rendered":"

This article is presented by LegalZoom. A frequently asked question in online real estate investing threads is, \u201cShould I form an LLC for my rental property?\u201d  It may seem like […]<\/p>\n","protected":false},"author":613618,"featured_media":183141,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[4241],"tags":[],"class_list":["post-186368","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-real-estate-business-management"],"acf":[],"comment_count":0,"_links":{"self":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/186368","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/users\/613618"}],"replies":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/comments?post=186368"}],"version-history":[{"count":0,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/186368\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media\/183141"}],"wp:attachment":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media?parent=186368"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/categories?post=186368"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/tags?post=186368"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}