LLC vs Sole Proprietorship

20 Replies

Hi everyone!

I have been debating creating an LLC or conducting business as a sole prop with DBA (doing business as). Currently, I do not have any properties. However, I plan to purchase my first rental property in the near future. I figure this is a good time to consider business structure before any properties are purchased.

I understand the personal protection and the ability to choose the tax structure an LLC provides, but does an LLC have additional benefits that a sole prop does not? Also, I'm aware that there is a greater cost to start an LLC as well as a yearly fee to keep it current. Would it make sense to create LLC even if I have only one, or even zero properties?

A little background on my situation. I live in IL, but am look to long-distance BRRRR rental properties in KY. I am considering creating the LLC in KY as I do not plan on living in IL for the long-term. Would this change my strategy?

Any information, tips, and recommendations would be greatly appreciated!

Thanks in advance!

@John Rooney

Hey John. It is worth the time, and cost, to form an LLC if your goal is liability protection. A DBA will not protect you from liability/lawsuits.

Like many areas in business, it's better to do it right the first time. There are different options for creating LLCs. You don't even need to form it in your state that you live or do business in. For example, I live in Maryland but have a SERIES LLC in Indiana. A series LLC allows you to designate multiple "series" LLCs underneath the master LLC, each with their own liabilities. I am doing BRRRR in Indianapolis, but can register my business in another state if I would like.

One important thing to keep in mind about creating an LLC out of state is that you need to pay a "Registered Agent" to forward important paperwork to you, such as judgments. You pay for an address and company for mail to go to. If you decide to live and do business in KY, then you can be your own registered agent.

Originally posted by @John Rooney :

Hi everyone!

I have been debating creating an LLC or conducting business as a sole prop with DBA (doing business as). Currently, I do not have any properties. However, I plan to purchase my first rental property in the near future. I figure this is a good time to consider business structure before any properties are purchased.

I understand the personal protection and the ability to choose the tax structure an LLC provides, but does an LLC have additional benefits that a sole prop does not? Also, I'm aware that there is a greater cost to start an LLC as well as a yearly fee to keep it current. Would it make sense to create LLC even if I have only one, or even zero properties?

A little background on my situation. I live in IL, but am look to long-distance BRRRR rental properties in KY. I am considering creating the LLC in KY as I do not plan on living in IL for the long-term. Would this change my strategy?

Any information, tips, and recommendations would be greatly appreciated!

Thanks in advance!

Specifically in KY, you will pay minimum of $175 LLET tax each year for a LLC. However, if you have multiple LLC, each will pay that.

Now, if you have a holding LLC, and that holding LLC owns other LLC, you will only pay that LLET tax at one LLC level.

As you can see, it has to be planned correctly. 

BTW, the LLC at your case provides no tax advantages.

  

@E Brady

Thank you for this great information.  This has definitely brought clarity to my situation.  I was unaware of the "Registered Agent", but will take that into consideration going forward.  Also, I completely agree with you about starting right the first time.  

I appreciate your help!

Opinions will vary

My thought process is that unless you have several properties, or a relatively high net worth, an LLC is severe overkill. As you mentioned an LLC will have startup costs, and potentially ongoing costs as many states require ongoing annual fees. It also means that you need to separate your accounting so as to ensure you keep your companies funds separate from your personal funds.

Lets assume a worst case scenario that your tenants sue for whatever reason. If the home is in an LLC, they could force the sale of the home in order to satisfy the judgement if they win the case. If the home is in your personal name they can still come after the house, as well as anything else that you own. But if you don't own much besides the house, then they aren't going to get much besides the house, in which case the LLC didn't really protect you from much of anything.

A general umbrella insurance policy in my opinion will likely serve you FAR better than an LLC would. You can generally find a $1million insurance policy for maybe $150-200/year, which could easily be what it would cost to create an LLC. In this situation if you got sued, your insurance policy would pay out and you would keep the house.

If you do go the LLC route, I would highly suggest forming the company in the same state that it generates money from. Because if you create the LLC in Illinois, but it operates in Kentucky, then you must also file paperwork so that your IL LLC is allowed to operate within KY, which means additional paperwork filing and annual fees.

@John Rooney

Hey John, which part of Kentucky are you looking to invest in? I’m from Northern Kentucky.

Definitely no expert on the issue and understand the benefits of opening an LLC, however, I was advised to open an LLC when I actually have enough wealth and assets that need protection.

John Rooney

Illinois changed their fees for LLCs a couple of years ago. $150 to start and $75 a year after that.

Not a bad idea to set up an LLC but don't forget the need for insurance as well. An LLC is not a get out of jail free card. It is only a layer of protection. Not a be all end all.

We get our business liability from Agent Mark Wojick with Shelter Insurance. He is actually one of my tenants. Make sure to get high liability on your business and on each property. 

Need access to a nationwide network of law firms?  PM me.

@Bob Daniels I appreciate the feedback. I was didn't know about that insurance policy, but I'll keep that in mind. Also, thank you for the info about forming the LLC in state that generates income. Thanks for your help!

@Anthony Porembski I am looking to invest in Louisville. I have been visiting Louisville since 2013 and love the city. Thanks for the suggestion about opening an LLC!

@George Skidis Thanks for the detail about LLC fee changes in IL. Also, I appreciate the info about the insurance piece of the equation too. This is a lot of good information to consider.

I appreciate all of your help!
 

@John Rooney thanks for starting the thread. This is very helpful.

I'm in a similar position now trying to figure out what legal structure would be best. I live in CA and my partner lives in OR and we're planning to BRRRR in Indianapolis. The pain is, from what I've read, just by the fact that I'm in CA even if the business is registered out of state and all business is done there, I'd have to pay the $800 a year LLC fee here. That'd eat a pretty good chunk of the cash flow from the first property I'd imagine.

I definitely want to sit down with a professional first to make sure. So on that note... If anyone has a recommendation for a good Real Estate Lawyer or CPA in Los Angeles, please PM me.

This a really great thread. Thanks everyone for the information. Taking all of the above into consideration, I think it makes sense in my personal situation to set up an LLC and possibly open an umbrella policy. I will be investing and live in Indiana.

I will be investing with a partner. Are there any special considerations when setting up an LLC with a partner vs as an individual?

In terms of financing, the newly formed LLC will obviously not have any credit associated with it. Do we just take out the mortgage in one of our names but hold the property in the LLC?

Originally posted by @John Rooney :

@Rob Bergeron thanks for suggesting the land trust!  I'll look into that. 

I hear it is the Rolls Royce of protection and staying anonymous.  

Hi John, looks like you have been getting alot of good advice above.  I have a blog that identifies 5 ways to protect your investment which may help to organize your thoughts.

https://www.biggerpockets.com/blog/pillars-asset-protection-real-estate-investors

There are a bunch of different opinions on the subject, ideally you want to understand your personal exposure and decide on what level of protection you are comfortable moving forward with. While some investors are comfortable with moving forward with higher risk, others prefer as much privacy and protection as they can to protect the wealth they have already accumulated.

Reading the advice you have received, the umbrella will handle most real claims, while the LLC will compartmentalize investments. The land trusts as owners can provide anonymity and an operating LLC can separate your required exposure from your ownership. The use of series lcc with specific land trusts to allow for joint ventures investment is another advantage. Aspects of these can assist in Estate Planning later on as you grow your business.

Let me know if any of this information is helpful and I can send you some additional links as you get familiar with asset protection.

This is not legal advice but rather my personal opinion. I would rather spend the money on more umbrella insurance than an LLC. I live in California where the costs of a business entity are particularly high so there is that. However, even in other states the costs add up. Set up fees, annual fees, agent for service if you live out of state, and some CPAs charge more for each LLC return. I'd rather have $3m or $4m of umbrella coverage. Having said all that if I was talking about a commercial building or large multi-family with tons of people visiting each day then I would do the LLC.

@Scott Smith thank you for your input and sharing your expertise.  Also, your blog describing the 5 pillars that protect your investment have provided a clear picture and a roadmap for asset protection down the road.  Your help has helped me see the different levels of asset protection.  Thank you!

@John Palley thanks for sharing your thoughts. You're right. The costs of an LLC will add up and eat into any cash flow when starting out. Since I'm am looking to invest in SFRs or small multi-family (1-4 units) to start, an LLC might be something I'll reconsider at a later point.

Thanks for all the help, I appreciate it!

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