Is it really worth setting up an LLC?

29 Replies

I understand why many people set up an LLC for their investment properties, but my question is simple: "Is it worth it?" I've asked several investors and they always say I MUST set up an LLC to protect myself from getting sued and losing the property. And I get that. However, I always ask the following question and get the following response:

Me: "Have you or someone you know ever been sued?"

Them: "No, but it's just for your protection"

That's like me saying, "Hey, why aren't you wearing a hard helmet when you walk outside. Didn't you hear about the guy who died when a tree fell on him?" Yes, it's safer for me to walk around with a hard helmet at all times, but I'm NEVER going to actually do it since it's inconvenient. I see the LLC like wearing a hard helmet. Yes, it'll protect me, but the likelihood of a tenant suing and winning is very unlikely (as long as you treat them with respect and dignity) like the tree following on your head.

I would love to hear stories about Bigger Pocket members getting sued and losing your property as well as why you got sued. Thanks!

The field is split 50/50 on LLCs. Those in favour do so because they  drank the Kool-Aid believing from others it is necessary and are paying for the physiological security. 

It is extremely unlikely you will hear any first hand stories. Insurance being the first and best line of defence.

Some investors simply sleep better at night believing a LLC is necessary. In reality it is like having two separate insurance policies on a property. You can not collect on both so in reality you are paying twice for the same protection.

The actual value may vary based on state law and specific state insurance regulations. 

@Michael Pazirandeh

In general, everyone should have proper liability insurance.

On top of that, an investor can use an LLC to shield their personal assets.

A creditor going after an LLC for money owed is limited to the assets of the LLC. They can't go after the personal assets of the owner or the managers, just what's in the LLC. So, in that sense, it protects you from creditors going after your personal house or your personal car, assuming they aren't in the LLC.

However, an LLC does not prevent anyone from suing your personally for negligence... Doesn't mean they'll win, just means they can still sue you.

There are two types of liability. Inside liability and outside. Inside is related to the activities of the LLC. Properly structured, the LLC would shield the owners and the managers of the LLC from personal financial liability. This would be tenants, lenders, vendors, visitors to the property. However, it wouldn't prevent outside liability from causing a problem. This would be someone suing you personally from your own direct actions and then going after all your assets including the LLC. So, an LLC would protect you from creditors (ignoring cases where you gave a personal guarantee for a loan), but it wouldn't protect you from tort (negligence) cases like a brick facade falling on a tenant or protect you from Fair Housing Act violations penalties.

@Michael Pazirandeh

You don't need an LLC. However If you get sued it is to late to get one. Yes I have seen people get sued first hand. I also agree that @Thomas S. makes some good points and he lives in Canada. The USA is the most litigious country in the world. 

If you use an LLC or not it has more to do with your asset protection plan for everything. Investment properties, autos, personal possessions, home, boat, etc. identify the risks you want to protect against and thevassets you want to protect and that will lead you in the right direction. It will also most likely have to be modified as laws, taxation, and technology changes in your lifetime.

Florida has an excellent homestead property protection plan so I would not put my Florida personal residence in an LLC.

Here are the 2 examples attorneys gave me when I was developing my asset protection plan. 

1. If you get drunk and hit a school bus and are found liable for killing a couple of kids, paralyzing a few others and hospitalizing others you can have a problem and lose everything, even if you have every valuable in a seperate single member LLC. Multi member LLC may be a bit better but most likely not. Most car policies in this situation are lacking in coverage.

2. If your LLC is sued by a tenant and found liable for more than the insurance awards and your property has equity you would have to sell the property and pay or at least end up with a lien on the property --but none of your other "personal" property would be involved in settling unless you personally were brought into the suit. Same thing if your other real estate holdings were in seperate LLCs they would be protected.

Some people make the mistake of putting all their properties in one LLC thus exposing all if a law suit prevails against the LLC. The attorney sees $$$$ in this situation and I think makes you a better target for a law suit.

Also consider management and repair work because that can draw you in personally. This is another mistake RE owners make. If you repair an electrical outlet and a fire occurs your insurance company doesn't cover you and you may be found liable personally. If you hired a licensed insured electrician I think you are in a much safer position. Another approach people use as protection is to limit what they own personally in their name. Lawyers that sue like to see assets that can be recovered easily so maybe keep properties heavily mortgaged as another deterrent. 

There are many ways to protect without LLCs but they may be helpful dependent on your situation. Checkout insurance, trusts, C corps, limited partnerships, over leveraging properties,  off shore holdings to name a few options to add to an asset protection plan. 

Hopefully this helps give you ideas but talk to an attorney or two. I am not an attorney but did stay at holiday inn last night. LOL

This question gets asked about once a week.  There are a few people who believe in LLCs but I think the vast majority of people tend to think that an Umbrella policy is better.

Umbrella policy covers more, is usually cheaper, and avoids a lien on your property or the chance of you losing your property if someone sues you (unless they're suing for millions). It also covers your legal fees and representation, which an LLC doesn't. The downside is most of the time umbrella lawyers settle, which can really make you angry if someone comes after you and you know you will win.

Umbrella policies cover more than your rentals as well btw.  It covers all personal stuff, auto, libel, slander.  Just about everything that could happen personally or professionally.

I don't use an for any of my rental activities. In CA they have an $800 filing fee for each LLC each year (both CA LLCs and out of state LLCs). I have umbrella insurance which is much more efficient and economical. Plus my activities (rental and non rental) are not the type that are inherently of abnormally high risk (e.g., I'm not manufacturing dynamite in my basement).

In my opinion, unless you are engaging in activities that attract unusually high sources of legal liability you should be able to acquire more than enough liability insurance to cover yourself at much less cost and effort than what it takes to establish proper entity vehicles. 

In the final analysis most of the folks getting LLCs don't need them, they have them either because they have been misled into thinking that they do need them (often by others who are ignorant and have been similarly misled), or they rather foolishly  see them as glamorous vanity accoutrements that will make others think that they are a real "player" in this game.

Updated about 4 years ago

I don't use an LLC for any of my rental activities. In CA they have an $800 filing fee for each LLC each year (both CA LLCs and out of state LLCs). I have umbrella insurance which is much more efficient and economical. Plus my activities (rental and non rental) are not the type that are inherently of abnormally high risk (e.g., I'm not manufacturing dynamite in my basement). In my opinion, unless you are engaging in activities that attract unusually high sources of legal liability you should be able to acquire more than enough liability insurance to cover yourself at much less cost and effort than what it takes to establish proper entity vehicles. In the final analysis most of the folks getting LLCs don't need them, they have them either because they have been misled into thinking that they do need them (often by others who are ignorant and have been similarly misled), or they rather foolishly see them as glamorous vanity accoutrements that will make others think that they are a real "player" in this game.

You absolutely do not need an LLC until you have some assets. When I first started out years ago everyone said start an LLC and put together a team. What a waste of time!

Get a house or two under your belt and then make that decision. Plus with any entity that you set up if you are not keeping up with minutes, meeting, dues, etc than they really aren't going to do you any good.  

Acquire  some properties, put some money back, decide if this is for you. If it is take your money you've put back and go speak with both a CPA and an attorney. Preferably both of these should have a real estate back ground.

Hope this helps, Ken

I read somewhere that a downside of LLCs is that you can't self-represent your LLC in court like you can as a sole proprietor, but instead you have to use a lawyer. Is that a legitimate claim?

The other side to the argument in the case of a law suite is that the suit can and will often name the directors (owners) as being personally liable. This of course circumvents the personal protection.

Lawyers are not stupid and they will try every possible avenue to go after assets held out side a LLC which is why insurance is really your only true protection.

It really comes down to whether the individual, as Michael suggests, wants to wear a hard hat when they go for a walk.

Still waiting for first hand examples.

@Paul G. Read what the two knowledgeable posters above you wrote. Umbrella policy's and LLC's aren't mutually exclusive, that means it's not "eithe/or" but "and".

Also the two informed posters above put the LLC proponents vs. just umbrella folks at 50/50. I think this is a much more accurate ratio then a few vs. many. However I see many new posters who think umbrella policy's do the exact same thing as LLC's - they don't .

@Steve B. I understand exactly what they wrote and I disagree.  Sure they aren't mutually exclusive, but I'd rather have an umbrella than have both and here's why.

You have your property in an LLC and it's valued at 500K (no mortgage on it) and get sued for 1M. Your insurance policy is setup for 500K liability. Surprise, you lose your property to satisy the legal battle. Doesn't matter if you have an umbrella policy or not since an umbrella policy is for personal (and as others have stated more for outside looking in). Not to mention you would have to pay for your own legal representation.

Same thing happens and you have just an umbrella policy and no LLC. Boom, nothing happens. Worst case is you settle out of court and your umbrella takes over and pays off whatever your homeowners insurance didn't cover. You keep the property and all of your equity and you have legal representation.

Tell me how having an LLC is better again?

Just this past week there have been about 5 threads about this exact same thing.  Reaching about 50-60 comments.  Yes, alot vs few recommended Umbrella policies.

I have yet to hear an instance where an LLC is better than an Umbrella Policy. Or a combo of both. I take that back. The only time is if they pierce the veil and expose you and come after you personally. Which is exactly what an LLC is suppose to protect you against.

Check out here for real world examples of what I've described above:

I will point out there are other reasons to hold property in an LLC. I've only touched on the aspect that most people key in on with asset protection.

The one advantage of holding in an LLC is you can replace members of the LLC and essentially SELL the property or exchange "share percentage" of the property fairly easily. So from THAT standpoint, an LLC has its advantages

If you have the ability to have an umbrella insurance policy, individual liability policies on the property, and keep your investment property in an LLC, do all. In most states LLC's are easy to operate, and inexpensive to form. In Real Estate, liability has the highest chance of attaching to the property and owner of the property. If your property is "owned" by an LLC, then state law protects you against judgments against the owner of the property (LLC). Your personal assets, other than the LLC stay out of it. Yes, yes the lawsuit happy slip and fall hacks will name you personally and your mother for bearing you and your high school teacher for giving you an A, etc. But they have a relatively lower chance of succeeding than they do if you own the property personally. This 150 odd years of "corporate" jurisprudence. And if you think tort lawyers are good at piercing LLC protection, wait till you see how good your insurance company lawyers are at finding a policy exclusion to keep from paying a big judgement. There is a reason why virtually no one owns 5+ multi-family in their personal name. Also LLC's help separate business and personal assets, especially if you have other equity holders/members (i.e. partnership). Once you get more than one or two properties, it's probably worth putting them in a limited liability entity, if you can. AND get insurance.

@Scott L. I agree that as you move up in the world, it makes sense to start thinking along those lines, but for the mom and pop investor, I don't think it makes sense.

Most people on this site, I've noticed, own 1-3 properties (if any), are new to investing, have mortgages taken out under their personal names and aren't allowed to transfer ownership to an LLC (Well, I guess legally they can, but it's against the terms of their Mortgage Due on Sale Clause). For the standard person, I can't find justification for an LLC.

For the person who owns 20 properties, a couple commercial buildings, and a 50 unit apartment complex, sure.  Go to your hearts content because you're opening yourself up for way more opportunities for something to go wrong.

I appreciate all the advice and input. Truly, I've learned a lot already!

I have yet to hear examples of people getting sued. You're all just telling me that I need to wear a hard hat (which trust me...I get). Any tangible examples would be most appreciated. Thanks in advance!

That's the problem. I have never heard of a single person on this board who has been sued with the property in an LLC.

There was one post about being sued for 4M, but the claim was so outrageous that it got thrown out. That person did NOT have it in an LLC btw.

Here's the post btw:

A few weeks ago somebody said they were getting sued for $4 million on their small apartment complex due to poor pest control. Search for "sued for $4 million" they stated glad they had an LLC, though their insurance was primary.

It is such a cheap and easy thing to file and follow, plus it makes books and accounting so easy. I am more than happy to pay for very cheap insurance. 

LLC's are not just about protection. If you plan to keep your business revenue separate from your personal income, you're going to need a business bank account. If you want to keep you business credit expenses separate from your personal ones, you'll need business credit cards. Going to need an LLC or some kind of business company entity to do so.

@Michael Pazirandeh The answer to your question "Is it worth it" depends. If you live in a van down by the river, than no, most likely not. The $200-400 filling fees could be better used on other things on your REI journey. Now if you have a well established life, a home with equity, a brokerage account in addition to your IRA/401k, some savings for a remodel on your home, and the like, then you have some choice to make.

Risk can, in a very very simple way, be quantified by the severity of the event and the likelihood of that event happening. If you would lose $2M if you got sued and the probability of that happening is 1%, then you'd spend $20,000 or less protecting yourself from that risk. 

In terms of having BP members with an LLC tell you their stories of getting sued: good luck. 1. just having an LLC will keep some of the ambulance chasers at bay for the mom and pop investors. There are just to many people doing things wrong to go after the non low hanging fruit. 2. by being an active on BP, the group has self selected to care about learning their craft and thus less likely to act in a manner that gets them sued.

If you want a place that has 100% stories of folks getting sued, start with your county/city court records.

We all want to protect our assets. No one would consider not having insurance. How much insurance, amount of deductible etc. depends on the investor. I believe LLCs fall into the same "depends on the investor" category. 

A LLC is believed to be a additional level of insurance. Whether it is or not is debatable but the lack of first had examples certainly points to it no being of statistically great value.

I still believe and will continue to believe the primary advantage of a LLC is physiological security. Investors that need a additional feeling of security to allow them to sleep better at night have a LLC. Aside from possibly additional administration, annual fees and maybe higher tax rates for them it is a small price to pay.

I do not believe it should be trumpeted as the be all and end all that every small time investor must have.  I believe statistics should or would prove otherwise if we actually had any.

Some may be interested in doing a search on the net of  "piercing the corporate veil".

You guys have never heard of a lawsuit where this would help? I think most people just avoid these conversations because they are on the forum daily.

My grandparents had bought a summer home from my grandmother’s aunt before she died (this happened in the 1940’s) Then there was a problem with that aunt’s estate where like 2 out of 14 heirs got left out. Those people’s heirs contested the sale of every property that was in that aunt’s portfolio. They thought that would be millions. Once they realized that there was maybe $100k over 9 properties split 25 ways it became a lot less interesting. So to clear my grandparents’ estate we had to track down and settle or sue the remaining of the 25 heirs.

Why? Because the sale of the home was not done correctly (this is rural Maine in the 40’s) and she was one of the 12 who “unfairly” received more than their fair share. So this dragged on for years (we couldn’t sell the property or distribute it) cost about $35k to fix a sub $10k problem.

Had my great great aunt treated her business like a business, or had her will clear and correct will wouldn’t have had this trouble. Instead she held everything in her own name.

I can already hear the howls of protest how this is an estate problem and of course this will never happen to you because you do everything correctly (except protect your assets) and your insurance policy covers everything. Great. It doesn’t hurt my feelings. Feel free to roll the dice. Asset protection isn’t designed to protect you against things you can anticipate, it’s to protect the rest of your assets against the things you can’t anticipate.

I agree with @Ken Barnett that you should wait until you have a few properties under your belt before you even considering an LLC, no need when you only have one or two SFHs. That being said, I see 2 main advantages to having forming an LLC that holds your properties:

1. I'd rather pay $500-$1,000 now to protect my personal assets in the case of an (albeit rare) lawsuit as opposed to losing my shirt in the event of one.

2. LLCs make it easier to write off business expenses. Car, insurance, taxes, asset depreciation, etc. The tax advantages real estate offers are one of the prime reasons it is such an attractive investment vehicle and should thus be taken full advantage of.