LLC, Personal Corp., or what?

Question

I am currently considering buying my first rental property. I just read chapter 16 (getting ready to close) in "The Book on Rental Property Investing" and it talks about keeping a checking account for rent and a savings for security deposits.

So my question is, at what point do you decide if you should have an LLC or business entity to protect your own personal finances? Do you have that for your first house, or wait until you're more established? Should I be working toward an LLC now before I get a property?

I would like to hear any and all thoughts on this and am open to discussion. Thank you.

Chris Seveney · Answer

@Cole Steele

Personal preference but if you have a good pm, insurance policy and are not a scumlord you should be fine not needing a LLC. I know people with net worths over $3M and have rentals in their name.

People are afraid to be sued, what can you be sued for, and if you have have a lot of  wealth then you should be able to afford an attorney who can defend you. LLC for commercial assets absolutely or multifamily for 1-4 units it’s not mandatory

Chris Davidson · Answer

@Cole Steele bunch of great advise here. What @Chris Seveney mentioned not a scumlord is key. If you do things right people wont be able to win a law suit against you.

If you do start a LLC or a company make sure you do it right. If you are going to do it halfway you are wasting money and making everything more complicated. Keep to the motto of do it once and do it right and you will be in a good position for everything.

Best of luck!

Jason Marino · Answer

Hi Cole,

There are varying thoughts on this, as you can see in the posts above. I think that the decision comes down to risk aversion. I always suggest that real estate investors have insurance policies. However, insurance claims can be and are denied. Insurance is a line of defense, but it does not have to be your only line of defense. When an insurance claim is denied, it is useful to have a limited liability vehicle that owns the property to separate the property from your other assets. These entities, when created and managed correctly, can and do compartmentalize the damage from a law suit. Based on this, I am not sure that there is any specific number of properties that you need to have in order for an LLC to make sense.

Eliott Elias · Answer

The second you think you need one is when you should get it. It is so cheap to form one, book keeping will become so much easier.

Scott Crowley · Answer

My quick answer would be that since you are already thinking about asset protection this early on, it is likely very important to you. So, you may want to form an entity for your first property so you are positioning yourself in a manner that not only protects your personal assets from the start, but will likely play a role in you sleeping juuust a little easier at night.

Others did a great job commenting on this. I also agree that not being a slumlord and having good PM are key ingredients in not being sued regardless of the way you go with it.

Another thing I'll commensurate the importance of is if you do form an entity, MAINTAIN IT. This means if you decide to form an LLC: Operating Agreement(actually do what the context of your OA states), Annual Filings(state specific and not all are annual), business bank account(don't pay for personal stuff out of it...EVER. Owner draw from it), annual meeting minutes, certificates, and so on.

This may seem like an ignorant distinction to point out, but if you do form an entity, make sure your business name is on everything that has to do with the reason you formed it. Such as, management & lease agreements. Not to mention, transfer title of the property into the entity if first purchasing in your name if we are talking residential.

When it comes to insurance, I am a believer in structuring your policies in a way that make the most sense for the investment, and offer the absolute most liability protection you can add.  Once your portfolio is big enough,  maybe adding an umbrella liability policy would be an option as well. They are typically super cheap. Whether personal holding or LLC, you want to have insurance paying the settlement if you were to be in an unfortunate situation with a lawsuit. With that being said,  I absolutely never rely or count on insurance to save me because it is a business and they are in the business of not paying out claims.

It is mainly because of my lack of faith in insurance having my back no matter what, that I prefer the asset protection route with entities.

LLC, Personal Corp., or what?

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