llc's. To make an LLC or not? Currently 23 tenants overall.
Oak Park, IL · Member since 2014 · 285 posts · 114 votes
llc's. To make an LLC or not? Currently 23 tenants overall.
Most Popular Reply
Scott SmithPro Member
Attorney · Austin, TX · Member since 2014 · 1k+ posts · 932 votesYou will find many different opinions on the matter. This really comes down to a numbers game, and you want to set yourself up in a position that if you number comes up you can be okay. When meeting with clients the first order is to discuss (A) their personal assets, (B) break down their current investments portfolio and other business ventures before discussing any (C) future goals. Each of these variables will dramatically change the advice for the individual asking this question. I often break it down into the "five pillars" of protecting your assets.
1st pillar is avoiding unnecessary and risky activities (don't drink and drive, insurance generally won’t cover your poor decisions) and take good care of your investments - these simple steps will help you prevent lawsuits before they even occur.
2nd pillar is a good insurance policy as that cover the majority of your exposure. However, insurance is limited because it only protects you from one type of liability: accidents/negligence. Insurance doesn’t protect you from any part of the sale or acquisition of a property (e.x. Somebody wanting to sue for you backing out of a bad deal or accusing you of selling them a property with defects like unknown termite damage). Insurance also doesn’t protect you from misunderstandings, especially those made in writing and email. What happens in these misunderstandings is that something goes wrong either in the sale or after, and then they sue you for some statement you made that they “misunderstood”. That lawsuit is a claim for fraud, and that’s what fraud typically is...a misunderstanding and someone being “injured” and wanting to hold the other responsible for it. Insurance never protects you from these kinds of claims and they happen all the time.
3rd pillar applies after you have good insurance You need to protect yourself from what insurance doesn’t cover by compartmentalizing your assets. Compartmentalization means that if something happens to one property they can't touch you or the other properties. You should use either LLC's (the old and expensive way) or a Series LLC (the new and more cost/time effective way). No matter where you live or where you own assets, I personally recommend the Series LLC to be a great tool for the individual investor who is planning to expand their operation, as it allows for you to scale infinitely for FREE- check out this article to learn more.
4th pillar is somewhat similar - you want to separate your operations from your assets. One company owns everything and does nothing (this is your SLLC a/k/a "asset holding company") and a completely separate company handles all of your operations (this is a traditional LLC a/k/a "operating company") For the operating company which serves as your face to the world and through which you do all your business, you establish a Traditional LLC to carry out the operations of your investments. The operating company takes on all of the liability that would otherwise blow back on you including: paying property management, paying contractors, collecting rent, marketing, etc.
5th pillar is owning everything anonymously. If people don't know what you own, then they are less likely to sue. People don't sue people that qualify for food stamps. This anonymity can be accomplished for free by using Trusts to own your companies as well as the assets. Trusts create this anonymity by removing your name from public record. Even if they can see you used to own a property, when properly transferred it will look like it was sold to investors. If they somehow guess you are the owner still, it doesn't matter because you are not the owner. The trust and the LLC are the owner of the asset/real estate, so even in the scenario that they guess, they guess wrong.
This isn't legal advice, just my opinion as a real estate investor.
7 Replies
- Real Estate Broker · 3412 S. Harlem Avenue Riverside, IL 60546 · Member since 2015 · 6k+ posts · 5k+ votes7y
@Atul Mohlajee I think you are reaching the point where you will want to start considering holding your properties in LLC's for asset protection. My theory starting out was that I would get LLCs once I had assets to protect. If you have 23 tenants in the Oak Park area, you have some real exposure now so it would be smart to start limiting your risk in that area.
The only down side to an LLC is the added cost of filing fees every year and the slight annoyance of having separate business banking accounts for each one. Other than that, you won't feel any real difference. If you want, I work with a great RE attorney who can help you work through all this. He has set up several LLCs for me recently, and he is very reasonable. This is definitely something you want your whole team to look at (RE Attorney, CPA) as you want to look at both asset protection and tax consequences.
- Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes7y
Making an LLC for each property is ridiculous. Do you think Warren Buffet sets up a separate LLC for each property he owns? For every 12 homes? Can you imagine the amount of work involved to keep each property separately? All because there's a 0.00019% chance of being sued? (that's a made-up number for illustration purposes only!)
I know people with 50+ rentals that are all owned in their own name. They protect themselves by knowing and obeying the law and treating their tenants honestly and fairly. Then they carry a large umbrella policy to cover anything that pops up. I know hundreds of real estate investors and don't know a single one that has been sued that would have been protected by an LLC. I'm certain it happens but the risk is really low.
I think the LLC would have benefits and there are a ton of threads and blogs on BP that will tell you what those are. Just don't rush into it thinking it's going to make life easier or protect you from a slip-and-fall lawsuit or that you can set it up and forget about it. There are requirements to follow and there are limitations to protection and there's a lot of bad information out there.
The DIY Landlord Book4.7248 Reviews - Attorney · Northbrook, IL · Member since 2017 · 719 posts · 549 votes7y
@Atul Mohlajee The biggest pain is probably sitting in the back to set up the bank account, followed by doing taxes. The benefits far outweigh the negatives. Everything I do in business falls under an LLC.
- 7yScott SmithPro MemberAttorney · Austin, TX · Member since 2014 · 1k+ posts · 932 votes
You will find many different opinions on the matter. This really comes down to a numbers game, and you want to set yourself up in a position that if you number comes up you can be okay. When meeting with clients the first order is to discuss (A) their personal assets, (B) break down their current investments portfolio and other business ventures before discussing any (C) future goals. Each of these variables will dramatically change the advice for the individual asking this question. I often break it down into the "five pillars" of protecting your assets.
1st pillar is avoiding unnecessary and risky activities (don't drink and drive, insurance generally won’t cover your poor decisions) and take good care of your investments - these simple steps will help you prevent lawsuits before they even occur.
2nd pillar is a good insurance policy as that cover the majority of your exposure. However, insurance is limited because it only protects you from one type of liability: accidents/negligence. Insurance doesn’t protect you from any part of the sale or acquisition of a property (e.x. Somebody wanting to sue for you backing out of a bad deal or accusing you of selling them a property with defects like unknown termite damage). Insurance also doesn’t protect you from misunderstandings, especially those made in writing and email. What happens in these misunderstandings is that something goes wrong either in the sale or after, and then they sue you for some statement you made that they “misunderstood”. That lawsuit is a claim for fraud, and that’s what fraud typically is...a misunderstanding and someone being “injured” and wanting to hold the other responsible for it. Insurance never protects you from these kinds of claims and they happen all the time.
3rd pillar applies after you have good insurance You need to protect yourself from what insurance doesn’t cover by compartmentalizing your assets. Compartmentalization means that if something happens to one property they can't touch you or the other properties. You should use either LLC's (the old and expensive way) or a Series LLC (the new and more cost/time effective way). No matter where you live or where you own assets, I personally recommend the Series LLC to be a great tool for the individual investor who is planning to expand their operation, as it allows for you to scale infinitely for FREE- check out this article to learn more.
4th pillar is somewhat similar - you want to separate your operations from your assets. One company owns everything and does nothing (this is your SLLC a/k/a "asset holding company") and a completely separate company handles all of your operations (this is a traditional LLC a/k/a "operating company") For the operating company which serves as your face to the world and through which you do all your business, you establish a Traditional LLC to carry out the operations of your investments. The operating company takes on all of the liability that would otherwise blow back on you including: paying property management, paying contractors, collecting rent, marketing, etc.
5th pillar is owning everything anonymously. If people don't know what you own, then they are less likely to sue. People don't sue people that qualify for food stamps. This anonymity can be accomplished for free by using Trusts to own your companies as well as the assets. Trusts create this anonymity by removing your name from public record. Even if they can see you used to own a property, when properly transferred it will look like it was sold to investors. If they somehow guess you are the owner still, it doesn't matter because you are not the owner. The trust and the LLC are the owner of the asset/real estate, so even in the scenario that they guess, they guess wrong.
This isn't legal advice, just my opinion as a real estate investor.
- Member since 2016 · 13k+ posts · 12k+ votes7y
What it really boils down to is phycological protection. For actual protection @Nathan Gesner is correct. If you "feel" safer with a LLC then go ahead. It is not something you need you do it if it is something you want.
If it feels good do it otherwise don't bother.
- Oak Park, IL · Member since 2014 · 285 posts · 114 votes7y
Thanks everyone who replied. I am amazed at the knowledge of RE professionals here as well as their willingness to help with their great advice.
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