Is it worth it to be a LLC?

Question

Should I become an LLC? Pros and Cons? I have two rental properties in Massachusetts. I am wondering if my legal responsibility will increase if I get a business license?

David M. · Answer

@Antea Alexander

I see you've gotten a mix of feedback.  Let me put some in perspective.  If its just you, then you have a single member LLC which by default at the Federal level is a disregarded entity meaning you don't file a separate return.  The IRS doesn't see you as a separate entity for tax purposes.  If you have two or more people, you default to being taxed as a partnership and you get a K-1 form from your partnership for use to file on your personal tax return.  Both are considered pass-through entities since the LLC isn't really filing its own return and paying taxes.  From a State point of view, that depends on your state but you will have some level of asset protection and I believe its still a pass through entity.

Some people advocate one property, one LLC.  But, then you start piling up on fees (registration and annual fees with the State, accountant for tax filings, legal to generate operating agreement if you need one) and you need to have a bank account for each LLC to show that you are operating a separate business.  As you can see from other discussions on BP, generally if you have "lesser valued" single family homes, keeping them in your personal name with insurance generally is the way to go.  If you have a "larger valued" property such as a multi-unit apartment bldg or other large commercial property, then it makes sense to separate into owns LLC.

Again, it depends on your level of risk tolerance and the fee structure you are looking at.  For example, there is a lot written here about California and how they have a yearly $700-$800 something fee to the State.  Some people are being charged another $500-$1000 by their account for each LLC filing.  If you have a single family rental, thats $1500-$2k being taken right off the top!  Of coruse, if you do your own bookkeeping and file your own taxes, then maybe its not so bad.  And yes, for some reason just about every accountant/cpa and lawyer seems to recommend creating more LLC's...

Oh lastly, I'm sure what you mean with your question.  So you have rentals in MA.  What legal responsibility are you talking about with what sort of business license?  I'm not familiar with MA, but what business license do you need with real estate investing (not include a real estate agent license)?  Or, are you starting some other business venture and want to keep your passive REI separate from this venture?

Cameron Tope · Answer

If you have an LLC, but don't operate it like a separate entity, then you "pierce the veil" and the liability protection is gone.

Most sole proprietors and smaller investors don't keep separate bank accounts or keep business money separate from personal funds, which makes their entities worthless.

You don't need an LLC for tax purposes either (a common misconception) because all the rental activity will be on your personal K1.

Also, if you have an property in an LLC and you're the owner of the LLC, then in a personal lawsuit (you get into a car accident, someone get hurts on your personal residence, etc.) the plaintiff can go after your assets in LLCs.

The LLCs only protect issues at the property from getting your personal assets, not the other way around.

Did that make sense?

I'm not an attorney but I've spent a lot of time with them setting up entity structures for my personal rentals and property management company.

Hope that helped!

Howard Herrington · Answer

@Antea Alexander, I would say that first, and LLC will limit any personal vulnerability to a potential lawsuit.  If you obtain a property as an individual, you are at risk of being named in any lawsuit and would have to defend all of your assets including personal whereas in an LLC, the risk is insulated to the LLC itself.  The LLC also benefits from "pass-through taxation" where the business taxes are actually passed through to the Individuals who own the business and therefore not subject to double taxation.

Mike S. · Answer

here is the link

As I wrote earlier, in some states your LLC will not be protected from outside liability as a creditor may force a liquidation of your LLC to get its asset to satisfy a judgment. However, if you use an LLC in a state with charging order protection as sole remedy (like WY for instance), in case of an outside liability threat, the only judgment could be a charging order against the distributions coming from your LLC to you. It can not force any liquidation or sale of asset from the LLC, nor force you to have distribution as long as your operating agreement does not mandate it.

Cameron Tope · Answer

I don't see a link to a video.

I would also like the name of the asset protection company you spoke with because, if that's true, then I've been misinformed by multiple companies.

Thanks.

Michael King · Answer

@Antea Alexander If you do go down the road of transferring title on your properties to an LLC, you will most likely need to have owned them for 1 year, and you will need written permission from the lender. This will prevent the possibility of your lender invoking the due clause.

As pointed out, you also need to keep your monies separate. Open up a business bank account and start funneling all rents into that today, and all business expenses out of it. At least you'll solve the "pierce the veil' part.

Mike S. · Answer

@Cameron Tope

A short video that may help you

Mike S. · Answer

@Cameron Tope

In fact I did and stand by my statement.

Cameron Tope · Answer

You don't have to take my word for it. Go speak with a couple asset protection companies and see what they say.

Mike S. · Answer

I would disagree with that statement.

If you have setup your entities in the proper state where the charging order is the only remedy, if you loose your lawsuit, the plaintiff will only get a charging order on your LLC. Your LLC operating agreement, if well written, will state that you don't have to make distribution and the plaintiff will get nothing out the LLC and won't be able to force a sale.

LLC are made to insulate your assets. If the liability is coming from inside the LLC (accident on the rental property for instance), you can loose the totality of the asset inside the LLC but nothing outside. If the liability comes from outside (your child injure someone with your car), you can only loose what you own under your name, not what is inside your LLC.

Insurances and entities are two different kind of liability protection. They are not identical. They complement each other. Do you need one, both or none? Only you can answer that question based on your risk tolerance and what you can afford to lose.

Is it worth it to be a LLC?

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