Renter · Long Beach, CA · Member since 2008 · 78 posts · 2 votes
Hi,
I was under the belief that LLCs or S corps were good entities for a real estate business because it separated business activities away from the individual. So effectively, once I could start signing non-recourse loans, I would not be personally liable for a property.
However Reed says that this is generally not true and argues that LLCs generally do not protect you:
Conclusion:
The sole proprietorship is generally best for real estate investors. LLCs are probably better than limited partnerships or S corporations. But the notion that LLCs protect you from lawsuits is quite misleading. It generally takes a balance sheet that takes advantage of favorable state bankruptcy exemptions and pension laws to protect you from lawsuit judgments.
Has anyone ever encountered this? I thought "non-recourse" was pretty strightforward, maybe not?
Real Estate Investor · Lynnwood, WA · Member since 2008 · 66 posts · 9 votes
18y
That sounds like poor advice. Keep in mind, if you are personally responsible for a lawsuit/injury, no entity is going to protect you. But, if an employee or contractor causes the issue, then the LLC can be of some use. Umbrella insurance is your friend here.
Renter · Long Beach, CA · Member since 2008 · 78 posts · 2 votes
18y
To be fair to John I was also not particularly fond of him after reading his website. But I ordered his "Aggressive tax avoidance" book based on a recommendation... it is in the top 3 real estate books I've owned. Reed's advice is top notch and timeless. Though the focus is taxes it goes beyond that and goes into depth about the issues involved with CPAs and other real estate professionals in general, and how to deal with them most intelligently. I would recommend that book to everyone.
The only part of the book that I questioned was his preference for sole proprietorships which stuck out like a sore thumb in the book. I looked back over it and the wording caused it to make sense... he said that for MOST investors a sole proprietorship with an umbrella policy is probably best. I imagine he's talking about part timers who wouldn't benefit from the extra complexity of business entities.