LLC for Business and LLC for Property Protection Question
April BirdsongPro Member
Member since 2023 · 62 posts · 28 votesLLC for Business and LLC for Property Protection Question
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Accountant · Bryn Mawr, PA · Member since 2023 · 409 posts · 321 votes
2ySometimes it's ok to be a sole proprietor this is a very tired subject on BP. You could file a DBA instead to have a biz name besides using your personal.
It is never a binary decision it is a choice especially for a beginner like yourself.
13 Replies
- Accountant · Bryn Mawr, PA · Member since 2023 · 409 posts · 321 votes2y
Sometimes it's ok to be a sole proprietor this is a very tired subject on BP. You could file a DBA instead to have a biz name besides using your personal.
It is never a binary decision it is a choice especially for a beginner like yourself.
- 2yDave KushPro MemberFrankfort, IL · Member since 2022 · 204 posts · 132 votes
You are going to get people who will respond to this thread saying you definitely need the LLC and other people who will say it's a waste of time. Both sides have merit.
You will want to think about your goals. If you plan on really scaling up, you'll probably want to go with an llc. If you're just going to hold a couple of properties, the cost benefit analysis may not pan out, and you will definitely get sued personally if your LLC gets sued. You have to have the personal protection either way, at which point the LLC is less important.
An accountant once warned me to be careful about using the LLC to manage the properties if they are not owned by the LLC because it could potentially trigger taxable events.
- Accountant · San Diego, CA · Member since 2019 · 1k+ posts · 552 votes2y
In general,
LLC will provide basic asset and liability protection and allow you to get its own bank account, where you can receive money, pay expenses and distribute profits. For tax purposes its a passthrough entity, but it makes it a lot cleaner to do tax strategies around maximizing expenses to lower taxable income.
- Member since 2023 · 62 posts · 28 votes2y
Thank you everyone for posting
- 2yStuart UdisPro MemberAttorney · Philadelphia · Member since 2018 · 2k+ posts · 3k+ votes
@April Birdsong I want to dispell a few myths here.
1. I am supportive of owning real estate in an LLC. However, if you elect to own the real estate in your personal name, creating a separate LLC to perform property management functions and to collect rent provides absolutely no added protections. In the event of a claim, the deed holder (you personally) and the business will both be brought in as claimnants. There's nothing you can do to prevent this and honestly you are merely wasting money. Its the text book case of an alter ego. Plaintiffs attorneys laugh when they see real estate investors do this.
2. I never understood the fascination with concealing the identify as a property owner. What purpose does that serve? If you go to the websites of any large real estate owner/developer the shareholders/principals bios are listed and the properteis will have their signage out front. Why is it that they are comfortable being recognized as the owners with far more assets on the table and then smaller property owners spend money and effort to conceal their identities? Not to get off topic here but I find many members of the BP community spend more money and time creating complexed webs of entities than my former employer who owned over a billion dollars worth of real estate. The difference was my former employer understood the actual steps associated with asset protection (more on this below in #4)
3. You can complete a refinance with a property owned in an LLC. Ultimately the lender will require a personal guarantee from the borrower unless the property qualifies for non recourse financing (which is rare and generally applies to larger transactions than those contemplated or executed upon by BP forum posters). Ultimately, if anyone is unable to obtain desired financing when their property is owned as an LLC, its the guarantor that's the issue and not the LLC and suspect the guarantor would have the same struggles regardless of whether the property is owned as an LLC or in their personal name. From my observations, many on BP beleive owning real estate in an LLC alleviates the need to personally guarantee the loan, which is false.
4. Merely owning real estate in an LLC does not provide you with protections. The LLC formation is worth as much as the paper its written on. The LLC formation combined with operatring the company in accoordinace with the operating agrement & appropriate funding to present itself as a viable business is what's needed. This is the key and what most fail to recognize. Furthermore, the best form of asset protection is contract managemnet. This means taking the steps in your daily business such as executing contracts and ensuring everyone who performs work is not only insured but lists you as additional insured. These are the things along with having approrpiate level of insurance (property/builders risk and general liability) to keep you out of trouble, not merely creating an LLC.
- Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes2y
@Stuart Udis
Hit the nail on the head and I would agree and have said same thing
One thing I will add is you mention contract management / this should include an attorney reviewing the contract and the investor understanding what indemnification is.
7e investments53 Reviews - 2yStuart UdisPro MemberAttorney · Philadelphia · Member since 2018 · 2k+ posts · 3k+ votes
Yes, Chris is right attorney review is helpful & Indemnification clauses can be complicated to understand and is where attorney review can be particularly helpful. However, where I find most investors and property owners trip up is in the contract management of GC to sub contract relationships. Most overlook this entirely but ultimatley the proeprty owner is held responsible if these relationships are not effectively monitored and papered corectly. Larger real estate firms will have in-house legal departments to handle this but the truth of the matter is the actual concept and procedures are quite simple once understood and all real estate owners would benefit from this but fail to implement the systems early on.
- Real Estate Broker · Chicago, IL · Member since 2014 · 2k+ posts · 1k+ votes2y
Quote from @April Birdsong:
I have just purchased 1st rental, and under contract for my 2nd...Yeahhhh I am very excited. Both in my area. So I am interested in managing them myself in order to learn. But now come the details.
Question #1: I do not want them to pay rent to "My personal name". So, I will need to create an LLC for my real estate rental business. I have read many pros/cons about actually putting my property into the LLC. At the very least, I still need to do my basic LLC for my business even if I don't place properties in there yet correct?
Question #2: Placing property into LLC. The biggest disadvantage is not being able to do a cash our refinance correct? Otherwise, there is more liability protection with it being in the LLC.
Thanks so much for the feedback.
April in Georgia
April: My first property years ago was a multifamily where I lived in one part while renting out the other units. With the advice of a mentor I had established an LLC to manage the property. My tenants did not know that I owned the property because the payments went to the property management company. This was before the days of getting on your computer and easily finding out who owns the property. So the answer to your first question is yes. Great choice to establish the LLC to manage the property. Another reason it's a great choice is if you continue to grow your portfolio the LLC will grow with it and provide other opportunities.
Regarding the second question regarding the benefits of placing the property in to the LLC. The answer is it depends. There are some lenders (private and hard money) who can only lend to an LLC for a cash-out refinance. The disadvantage is the rates will may be higher than a Freddie/Fannie-backed loan that you get in your name.
Regarding liability protection- There are protections provided by having an LLC, but a good attorney will find a way to pierce your LLC if they know you have other assets. If you're concerned about Liability then I recommend you research where the best places to establish an LLC to maximize your protection and also study how land trusts work.
- 2yStuart UdisPro MemberAttorney · Philadelphia · Member since 2018 · 2k+ posts · 3k+ votes
Despite LLC's being one of the most discussed topics in this forums I continue to observe inaccurate infromation being shared. I attribute this to a lack of understanding of litigation, the claim participants and objectives of the parties (particularly the plaintiff's attorney and insurance carriers).
SEPARATE MANAGEMENT LLC
A separate managemnt LLC may make sense when your portfolio is large enough to absorb the cost of an employee and you want to self manage. It would make sense for that employee to be employed by the management LLC. If this does not apply, creating an LLC for management purposes makes zero sense, provides no additional liability protection and is referred to as an alter ego. In fact, all it does is add costs to your business operation because you now must pay for general liability and professional liability insurance for this service providing 2nd entity (if operated correctly, which I suspect nobody who contemplates this on BP actually does). Not to mention, in the event a lawsuit is brought, the plantiffs attorney will name the deed holder LLC as a defendant and likely the management company as well. Now you have a situation where you could have two insurance carriers fighting over who is going to pick up coverage. In fact, this may actually complicate your defense coverage.Lastly, what is the obsession with real estate investors wanting to remain anomymous? This may only pique the plaintiffs attorneys interest to dig in further to see who the owner actually is. Meanwhile, operators who have legitimate balance sheets and large portfolios don't hide behind the curtains....ever stop to think why that's the case? Because they realize this is simply idiotic and they focus on the the things that actually keep their asset protected by implementing the procedures in their day to day business that actually prevents claims from being brought. Meanwhile the novice investors are focused on creating alter ego managment LLC's and remaining anonymous but are far more exposed to liability.
It is Easy to Pierce the Corporate Veil
This is furthest from the truth. A "good attorney" cannot pierce the corproate veil if you operate your LLC and your business correctly. Again, its usually the real estate investor who is focused on anonymity and has a spearate management LLC without any legitimate reason who is in a position for their LLC to be pierced because they don't have an understanding of how their LLC's should be operated and are likely operated incorrectly. But even if that were the case....news flash.....a plaintiffs attorney does not want to pierce the corproate veil of these individuals. They want to collect on their insurance coverage. Its how the plaintiff gets certainty of recovery and most importantly how the plaintiffs attorney gets certainty of compensation for their services.
No land trusts, no wyoming LLC's, no separate management LLC's as are frequently contemplated on these forums. I suggest owning investment real estate though an LLC, but learn how to operate the LLC correctly and most importantly follow through on the best practices in your daily business operation. That's where the investors who "get it" focus their attention. Not remaining anoynmous or worried about the laundry list of things most novice investors focus their time and energy on that adds zero value.
- 2yElise Bickel TauberBusiness MemberReal Estate Agent · Cranberry Twp · Member since 2017 · 384 posts · 198 votes
Just an alternative thought, depending on the state you are located in, would it make sense to open an LLC for the management of your rentals? I am a broker in PA and from my understanding of the law you can manage your own properties without a real estate license. Therefore, you can buy the properties in whatever name you would like and then manage your own rentals through the LLC you create which would create a protective barrier between the tenants and yourself. Just a thought.
- CPA · NY · Member since 2023 · 891 posts · 157 votes2y
Congratulations on your new ventures in real estate investing!
Let's address your questions:
Question #1: Setting up an LLC for your real estate rental business is a prudent step for liability protection and organization. Even if you don't immediately transfer your properties into the LLC, having the LLC established can still provide benefits such as separating your personal assets from your business assets, potential tax advantages, and a more professional image for your business. So yes, creating the LLC for your business is a good idea even if you don't immediately transfer properties into it.
Question #2: Transferring your properties into an LLC does offer liability protection, which can be crucial in the event of legal issues. However, you're correct that there are potential disadvantages, such as limitations on financing options. Some lenders may be reluctant to extend mortgages to an LLC, or the terms might be less favorable compared to individual ownership. Additionally, as you mentioned, doing a cash-out refinance might be more challenging with properties owned by an LLC.
It's essential to weigh the pros and cons carefully and consider your long-term goals for your real estate portfolio. You might want to consult with a real estate attorney or financial advisor who can provide personalized advice based on your specific situation and objectives.
Overall, while there are advantages to holding properties in an LLC, there are also considerations to take into account regarding financing and other factors. Make sure to do thorough research and seek professional guidance to make informed decisions that align with your goals and risk tolerance.
- Member since 2023 · 62 posts · 28 votes2y
Thank everyone very much for your wisdom, experience, and feedback.
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