Best Corporate Structure?

Question

Hello! New investor here trying to figure out how to best get started. I want to make sure that my personal assets are protected, and I've heard LLCs are the best way to go, but do I create a new LLC for each property I have to protect them from each other (i.e. if one tenant sues the LLC, I don't want my other properties to be at risk)?

Also, do I have a “parent company” that manages the LLCs as well? And is that parent company an LLC too or something else?

Also, I’ve heard mixed reviews about buying your first investment property vs renting it and “subletting” as short term rental. Any thoughts there?

And finally, what happens if a tenant sues the LLC and I don't have enough money or assets to cover it? Does the LLC just go bankrupt or am I at risk personally at that point? (Please note, this assumes my LLC is set up correctly and I have not "pierced the veil between my LLC and my personal assets).

Thank you so much for any guidance! I have read so many conflicting ideas that I’d love to hear from experienced investors (any experience).

Katie Balatbat · Answer

@Christine Brown

There are several considerations that can go into the analysis of whether you need an LLC or whether a large insurance policy will suffice. Will depend on several factors like the type of property, type of tenants, your risk tolerance, other assets you own, your estate planning, laws where the property is located, etc.  Same goes for number of LLCs and what to fund them with, since bear in mind that CA tends to be more cumbersome and expensive to have LLCs than other states.

California is generally more involved than other states when it comes to taxes and filings. Even if you create a non-CA LLC, if you are managing the business from California, you may be deemed to be "doing business" in California and therefore maybe subject to CA taxes. California charges a minimum tax of $800 a year per LLC, and more if you have gross receipts in excess of $250k. So, if you create an LLC in another state, you may need to register it as a foreign LLC in California. Though, this process will be the same for the other state (if you created a CA LLC you may need to register it as a foreign LLC in the state in which you are doing business/holding property). This means that you may need to pay registration and filing fees in at least 2 states if you don’t buy CA property as a CA resident.

Any lawsuits should be limited to the assets of the LLC and not your personal assets (assuming you run the LLC appropriately and the corporate veil is not pierced, some debate as to SMLLC). But, an LLC will not limit you from liability in total. You can still lose your investment in the LLC.   Or, a charging order may be granted.  If you have a loan, you may wish to look into due-on-transfer clauses.

If you're going the umbrella insurance route, perhaps see if it will cover you for several things including just the routine slip and fall (like mold or earthquake). You'll also want to ensure you have a good property manager to look after the upkeep of the property if you are not there to notice anything deteriorating or which may need attention.

Creating an LLC in California could cost you a minimum tax of $800 every year. You would have ongoing filing requirements with the State and would need to keep business records and documentation.  California does not recognize series LLCs.  You'll also want to coordinate with your estate plan, and consider getting an estate plan if you do not yet have one in place.

These are all things you will want to discuss with your attorney and CPA. If you need references for either of them in San Diego, let me know.

*This post does not create an attorney-client or CPA-Client relationship.  The information contained in this post is not to be relied upon.  Readers should seek professional advice.

Christine Brown · Answer

@Stuart Udis that's exactly what I'm finding! There's so many approaches and information that it's easy to slip into analysis paralysis. Much of this also gets into owning multiple properties, and as I'm just starting out and looking to invest in my first one, I'm going to follow your advice and keep it super simple with just one LLC. I'm trying to shift my mindset away from needing to know everything right away for my long term goals, to simply learning what I need to take this first step. That may mean I pay more than I need to at first, but it's about the long game and continuing to learn as I grow. After all, I can always adjust as needed in the future.  Thank you for the advice!

Payton Haight · Answer

Hi Christine, I would recommend discussing with an experienced real estate attorney to find a solution that fits your specific goals.

Depending on where you are located, different answers may make sense. For me when I was living in CA, I avoided creating many LLC's because there was an $800 fee/year. I just got a fairly sizeable liability insurance policy and an umbrella policy to cover myself. I was also able to get better rates and terms buying the properties in my personal name than under an LLC.

Now that I am in Ohio, it is much more affordable to have LLC's so I have been buying individual properties under their own LLC. I have not created a parent LLC yet.

Ryan Coon · Answer

Hi Christine, these are great questions and the answers depend on your personal goals and your appetite for asset protection. For optimal asset protection, having an individual LLC for each property will provide the most comprehensive separation and protection for the properties, in particular in limiting each properties exposure to the liabilities of other properties. This is often ideal, especially for investors with only a few properties because the less properties you have, the bigger hit it will be to lose multiple properties to a single suit/liability incident. I see some investors who have dozens of properties opt for more than one property per LLC because 1 LLC/property becomes cumbersome and these investors can absorb the loss of 2-3 properties more easily than investors with fewer properties.

As for parent companies, an LLC setup in WY, NV, or DE, disregarded (or partnership) is often ideal because these states provide robust protections to prevent personal liabilities from exposing the LLCs/assets under the holding LLC and can also help provide a barrier of anonymity/privacy.

Lastly, if an LLC is sued and the assets of the LLC are exhausted by the judgement, then generally the buck stops there, they cannot go after the assets of the owners of the LLC.

Stuart Udis · Answer

@Christine Brown You are not alone in your pursuit of these answers but your post highlights the blessing and curse of the accessibility of information that now exists online. Not long ago a new investor in your shoes would consider a single member LLC in the state in which they lived or possibly the state where they intended to purchase real estate and the remainder of their focus was on the underlying real estate. Now so much more time, energy and resources are devoted to everything other than the underlying real estate.

Keep it simple. If you are just gettting started and buying investment real estate individually,  a single member LLC is sufficient or if you have a partner/partners, a multi- member deed holder LLC.  Beyond that, focus your time, energy and resources on acquiring real estate with good underlying fundamentals, operating that real estate well (avoid any conduct that rises to negligence, and most certainly gross negligence) and on business development.  No parent companies, no management companies, no wyoming LLC's etc. etc.

Mohamed Youssef · Answer

@Christine Brown

if you are the only investor and you don't have too many investors, you should put it all in one single member LLC. The insurance policy is more important, if you can get an umbrella for at least $2 mm that would good, $5mm coverage is great.

Mohamed Youssef · Answer

@Christine Brown sorry, I meant to say if you are the only investor and don't have too many properties

Chris Seveney · Answer

Keep it simple - get insurance for potential tenant lawsuit. if you are sued for something insurance does not cover, then you will most likely have been found personally liable so a LLC would not protect you anyways.  I would never in 1000 years have a LLC for every property as the amount I would pay in registrations and to accountants every year and bank accounts would drive me nuts.

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