LLC or not? If so, which LLC option is best?

Question

Hi BP,

I own 2 rental properties in Baltimore MD and i am first having trouble deciding on whether to place them in an LLC or not (I plan to slowly scale and house hack a new property once a year). If so, I am having trouble deciding on whether to create an LLC in Maryland (where the properties are) or Wyoming (cause of the know benefits). The last note was that i learned what a series liability is and was curious if i may be better off doing one of those because i have 2 properties and plan to slowly add more (Maryland does not offer series llc but wyoming does). Any information or suggestions help. thank you!

Jason Watson · Answer

Yeah this topic is certainly exhausted.

LLCs do not protect you from torts especially if you, the human, is careless or reckless in the direction of the LLC.

LLCs can be expensive. Maryland is not bad. California has a $800 minimum franchise tax per LLC per year (and it could be higher depending on gross receipts).

LLCs allow for orderly transfer of wealth upon death through an operating agreement. Like a trust.

LLCs do not open some magical door to more tax deductions.

I tend to recommend LLCs where the properties are located, but then those LLCs are owned by a Wyoming multi-member LLC.

But if you think that you can skip fixing that loose railing and hide behind an LLC when the tenant is injured, you'll regret it.

Stuart Udis · Answer

Probably the most exhausted topic in these forums. I personally believe in owning real estate in LLC's but the reasons are more for business planning than asset protection. Nobody has a crystal ball and knows what the future holds, but if you want to introduce a partner/sell ownership interest its far easier if the property was originally owned as an LLC rather than in your personal name because selling membership interest in an LLC is far simpler than re-titling real estate.

Also, if you own enough real estate, shit happens. By that I mean issues arise that may not necessarily be your fault and when they do and a claim arises, the LLC not you personally will be listed as the defendant (unless you are dealing with a scummy attorney which is extremely rare regardless of what those using scare tactics to sell expensive asset protection systems may tell you). Now let me emphasize personally being listed as a defendant is rarely an issue from an asset protection perspective because the plaintiffs attorney cares more about insurance proceeds than your personal assets. This is because insurance proceeds are the path of least resistance in terms of collection (more on this below). However it doesn't change the fact your name will be forever be listed on a docket and its one more thing you have to explain to banks, financing companies, employers etc. Therefore the LLC is most helpful in merely keeping your name out of claims, not necessarily protecting your personal assets along with the business planning point I made earlier.

Now onto where to form an LLC... Keep it simple and form an LLC in the state where the real estate is located. I have yet to have a BP poster explain to me why a Wyoming LLC as opposed to an LLC in the state where the property is located will prevent a plaintiffs attorney from filing a claim against the whomever is listed on title when a premises liability issue arises amongst other common real estate investor/landlord claims. This boils down to most investors who concern themselves with LLC formation and asset protection inability to articulate what exactly they are protecting against. This is why it's helpful to understand the mechanics and process of the litigation process. Ultimately if you have proper insurance, 99.9% of plaintiff's attorneys are going to be most focused on securing the insurance carrier's cooperation because the plaintiff's attorney is most likely representing their client on a contingent basis and the insurance proceeds are how they are compensated. Not by obtaining a judgement against an individual or an LLC for that matter because all they have at that point is a piece of paper, not cash proceeds. In fact when plaintiff's attorneys are completing discovery after a claim is filed, insurance policies that could be related to the underlying claim are the items most critical to their discovery process.

Unfortunately there's a lot of services out there who play to investors fear and inability to articulate the risks they are protecting against and sell expensive asset management systems, suggest management LLCs' etc. Ultimately none of this will prevent a plaintiff's attorney from bringing a claim against whomever is listed on title. Understanding this and the mechanics of litigation should help you back into running your business in a way that prepares you for plaintiff's counsel behavior. This means having appropriate insurance, executing contracts with vendors/subcontractors and ensuring you are listed as an additional insured (not just  a certificate holder) on their insurance policies. If you take care of these items consistently you don't have much to worry about & will save time and money better spent being refocused on your real estate business.

Joe Norman · Answer

As mentioned above, the liability and tax benefits of an LLC are really minimal. IMO the main benefit is anonymity if they are set up properly.

If you register your LLC in a state outside of Maryland, then be sure to register it to do business in Maryland. Otherwise there could be signficant taxes and fees if you sell as an out of state owner.

Michael Plaks · Answer

@Kyle Weinapple

Search this forum for "LLC insurance asset protection"

You will find dozens of prior threads where this topic has been debated to death.

Corby Goade · Answer

Nothing to add here beyond simplifying the concept.

Just dumping a property in to an LLC (regardless of the state or type) doesn't absolve you of any liability on it's own. I'd venture to say that for 95% of the investors I've met, their LLCs would be completely worthless if they were to be used.

You have to consider financing, liens, insurance, bookkeeping and accounting, etc. Any missteps or misunderstandings of how those all work together will render your LLC useless.

Best to meet with a savvy attorney and strategize your specific situation.

Michael Plaks · Answer

@Stuart Udis

May I suggest that you re-post your excellent answer as your own separate post, possibly with even more content? Thanks for chiming in.

Stuart Udis · Answer

@Michael Plaks I've posted on this subject frequently on BP. Here's a link to a post that covers this in greater detail. Most investors are singularly focused on preparation for when the claim or liability arises but cannot articulate the risks they are protecting against and believe the strategies of convoluted LLC's are the best line of defense. Meanwhile  they completely ignore the action items that should be implemented on a daily basis to greatly reduce the claims from arising in the first place and fail to take the steps that properly prepare for when the claims arise.  I am a strong proponent of what I refer to as proactive asset protection but its not promoted because its not the revenue generator that other asset protection services yield. There are many asset protection service companies (some invest heavily on advertising on BP) who  take advantage of inexperienced investors own lack of understanding and upsell them on services that aren't necessary.

https://www.biggerpockets.com/forums/12/topics/1185366-atten...

Sebastian Bennett · Answer

@Michael Plaks Check out this forum for a good laugh...single handedly points to everything wrong with the asset protection misconceptions most bigger pocket investors are guilty of.Anderson Business Advisers Asset Protection (biggerpockets.com)

LLC or not? If so, which LLC option is best?

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