My accountant says I need a separate LLC for every rental property...

30 Replies

We are new investors and are looking to set things up the right way. Our plan is the buy one or two properties a year. After talking to our accountant he recommended that each property by under its own LLC to protect the other properties in case of a lawsuit. Has anyone had experience with this or is there a better way?

*Disclaimer: I am not an attorney or accountant, nor should any of what I say here be construed as legal advice or financial advice - check with a professional.

This sounds about right/reasonable but "it depends" is the right answer.

Imagine the scenario:

- You own 2 rental properties, property A worth 400K and property B worth 400K. For simplicity - no mortgages, you own these outright.

- They're both in the same LLC.

- Rental property A has a lawsuit naming your LLC as a defendant, and you lose; judge orders payment of 1M $. Insurance (assume you have it) pays but your liability cap was 500K. Your LLC now owes 500K additional.

- Now the plaintiff can obtain judgement from both property A *and* property B; both are liquidated to pay damages (A covers 400K of it, and B covers an additional 100K of it) - your LLC now has a worth of 300K, down from 800K.

If you had owned property A and property B in separate LLC's, property B would have remained untouched (assuming there was nothing causing the court to go after your other assets - i.e you grossly mismanaged the LLC finances or something). You would have lost property A and the LLC would have gone insolvent, but that would've been the end of it.

The entire point of the LLC is to shield assets; i.e you want to protect property B from judgements against property A, and visa versa.

Of course you could just decide that you only care about protecting your PERSONAL assets, the scenario could be that property A and property B are only worth 50K each (whether encumbered by debt (*I'm not entirely certain but pretty sure even if property gets liquidated to pay a judgement, mortgage holder has priority to be repaid?), or just lower class properties, etc.)

In this case you may not care about protecting each individual property but rather you just want to protect yourself personally (i.e your own personal home, car, savings, etc.), so, no worries - throw them both in the same LLC, and call it a day - saves you some filing and so on fees I suppose. (more valid if it's lower class properties with no appreciation; less so if its debt, as the goal is to likely pay off that debt eventually?)

Note that there's also the concept of a series LLC which gives you one parent LLC and multiple children; from what I know the protection of the children being segregated individually vs collectively has not been tested in court however?

Anyway - strongly advise you consult a good attorney to get a final answer - give them the full picture of:

- Your finances

- Your goals (what you're worried about)

And they in turn should be able to give you a solid recommendation of how to proceed. 

If I was an accountant I would want you to also have dozens of entity... Frank
Frank Romine, Real Estate Agent in CA (#01957844)

Hi @Trent Mettenbrink .  That's great you want to buy 'one or two properties a year'!  What type? There are dozens.  Strip malls?  Bowling allies? MH parks?  Self-storage?  

For single-family homes, I just have them in our own names and carry good insurance. A dozen properties, a dozen years and no lawsuit. The chances are slim of getting sued if you are above board. Many a title here on BP has sought that one instance the LLC helped protect the owner from that slip and fall we all fear. Haven't seen a case where it helped yet although I'm sure someone out there one time had an exception.

Residential houses in LLCs have problems with financing and insurance in my experience. And yes, each entity has a bunch more work on the bookkeeping and tax end.  Of course your CPA wants you to have more tax service needs!  Like @Frank R.states.

If you are dealing with commercial properties, consult a competent and qualified RE attorney that is an entity and asset protection specialist. I am not one, just sharing my experience. I have 3 commercial properties in LLC(s) and an S-corp that manages all of my rentals. They were established with professional assistance. Good luck!

The only time I have set up LLCs is when I have ownership interest with other people.  LLCs just make that scenario less complicated all the way around.  Other than that, they're all in my personal name with excellent insurance.

I'm a CPA, so it would cost me nothing to do a tax return for each LLC.

Trent -- I doubt that you need individual LLCs for each property. I have three LLC's and they each have reporting requirements, tax requirements, etc. Just starting out and assuming that you are talking residential properties, it is probably more important to have excellent insurance for each property. I have multiple properties in each LLC and also carry insurance on each property and an umbrella coverage for the LLC. My accountant seems to handle the current structure just fine. By the way, I am also an attorney and liability protection also falls under the purview of the attorney. Even if you have an LLC for each property, improper handling of that LLC may result in personal liabiity. If you have a substantial number of assets or are really concerned about potential liability -- talk with an attorney.

Best, Teresa

I have been given the same advice from both my attorney and my accountant. At present I have two Residential properties in my own name, two commercial properties in an S-Corp, two commercial properties in an LLC, and one residential property in another LLC (with the goal of purchasing another residential to be owned by that Entity, for a total of two properties under that entity name). Do what your advisers tell you to do.

If the LLC is the way to go in regards to each rental property commercial or residential. Did you have your attorney write up all of the paperwork or were you able to file it yourself. I think there is a considerable savings if you'd file it yourself. Also, with those that do have the LLC's is the insurance about the same as having personal insurance? Thanks

I think that a LLC for each property is overkill....especially if these properties will have mortgages on them (ie. little equity). Also, probably don't bother with an out-of-state LLC. Open a LLC in the state you are doing business. Otherwise, you'll pay foreign entity taxes on top of your your yearly LLC fees.

Having said that, I would personally open a LLC for each state I'm investing in.

Run your business like a business. Do all things legal. Put things in writing. Know the rental laws. You most likely won't be sued. If you are, you'll probably win and countersue for expenses. If you don't want to have too much asset value, you can always take out a loan on the equity of your properties as they gain that equity. Use it to purchase more properties.

@Steve Vaughan @Frank R. @Linda Weygant

Honest question for you guys related to tax preparation: do you find that CPAs charge per LLC even if it's single member?

I haven't been charging my clients for single member LLCs (unless their books need to be scrubbed) since the LLC is disregarded for tax purposes. Of course, I do charge extra per property owned. Am I missing something?

Didn't even read this except for the title. Your accountant is reaching in your pocket to duplicate tax returns and accounting. Totally not true for single family dwellings. If you have a multi-family project, 5 or more units, put that in a separate LLC, that's a bit different.

Get another accountant! If you lost a law suit and they pierce one LLC, the judgment goes to those assets first, if the judgment isn't satisfied, guess what your ownership of a sting of LLCs is? Personal assets! They can walk in the back door of every company you own.

You'll find this discussion in other threads on BP, asset protection and entity topics.  

You have more risk exposure driving your car than you do with owning a single family home as a rental! 

I heard an attorney claim that real estate was the most litigated area for liability, I bet that is a stretch tying slip and falls and medical claims to the real estate, Yes, all accidents happen on planet earth, doesn't mean the property owner was negligent.  I'd say horsefeaters. 

Tell your accountant to stick to accounting. Good luck :)

Originally posted by @Brandon Hall :

@Steve Vaughan @Frank R. @Linda Weygant

Honest question for you guys related to tax preparation: do you find that CPAs charge per LLC even if it's single member?

I haven't been charging my clients for single member LLCs (unless their books need to be scrubbed) since the LLC is disregarded for tax purposes. Of course, I do charge extra per property owned. Am I missing something?

I definitely do not charge for a single member LLC as such. I charge by the complexity of the return. So if the client gives me a set of books for the LLC and I can quickly and easily tie out the rental income, mortgage interest and property tax against the third party documentation for such and the asset basis (for first year client), then it's super quick and won't add much to the cost of the return.

It's sorta like charging hourly (although I do have a minimum, even for a 20 minute tax return) - hand me something clean, and it's super cheap for you.  Hand me something that's gotta be torn apart in order to even figure out what's going on and it will be much more expensive.

The vast, overwhelming majority of LLCs are worthless.

I realize that may be a controversial notion on BP.  But it is a fact.

Almost nobody I have seen posting on BP about how they are using LLCs for asset protection is actually providing themselves with any meaningful asset protection.  Piercing the corporate veil on most residential real estate LLCs is a trivial task.

This is called a series LLC. I was informed by a few lawyers that this type of LLC has not been seriously tested in the court of law so they are uncertain as if it will add additional protection or not. I was told to ramp up my liability insurance protection which I have done.

Larger properties need to be in their own separate entity, smaller ones can be grouped to save money on book keeping costs. Insurance is really what will save you, not an LLC.

@Joe Villeneuve could you expand on why you do it this way?

A new LLC for each property seems a bit much for me, but it really depends on how much you want to protect. For most people, using a single LLC for a few homes is fine, but for some they prefer to protect each asset on it's own. To each their own, I suppose.

We have an excellent Lawyer in Florida who has spent ~ 15 years suing people and another 15 years or so protecting his clients from liability issues.  My husband and I have an almost bullet proof system in place in case of a lawsuit. We have a corporation, a family limited partnership (FLP) and land trusts for each property. Basically, if someone were to sue me for a particular property, not only would they sue my corporation which in itself is quite a good protective layer, but they would also have to sue my family limited partnership which holds each property and they wouldn't know if I had any other properties because the land trusts act as bubbles around EACH property.  Even if we were to have 20 properties under the corporation and FLP, they wouldn't see it. We have 3 levels of protection + insurance. 

We are out of state investors and the last thing we want is deal with a lawsuit. Yes, it's a little pricer to have these 3 entities set up but we think it's really worth it.  

I agree with @Janie G. stated, it's rare to be sued in real estate, but would you rather have everything set up for nothing, or have it in your own name, and LOSE everything?

-Ben

@Trent Mettenbrink everyone will have their own style and promise their way is best. I suggest you listen to everyone's style and ask questions, then decide which works best for you. Meaning which will help you sleep at night. My plan is to do land trusts for each property with a LLC managing them.

@Janie G. would you care to disclose the name of the attorney. It sounds like you have great layers of protection. One note: many people are resorting to land trusts. Those do allow some privacy but in a court of law, if you are being required to disclose assets, you must do so.

John Thedford, Real Estate Agent in FL (#BK3098153)

Separate LLC are overkill. While they do provide a certain level of protection, theyre not bullettproof. A trust would provide more protection, but it's not even needed until you have accumulated a certain net worth. But creating an LLC for each property wont protect against damages a tenant could sue over for something you did personally. So it's not worth the extra leg work. Just follow the rules and you should be fine.

Thanks. I ended up going with an LLC and umbrella coverage for protection. Our attorney thought it was unnecessary for a seperate entity for every property. Once we establish enough wealth in property he thought trusts would be the way to go at that time. But as we are just beginning one LLC would be just fine.

A lot of posts, but I'm an RE investment and asset protection attorney and been doing this for 15 years. So here goes...

Always put an investment property in an LLC. And it's not because I'm an attorney. Yes, I hear the debate all the time about whether to. There are multiple layers of protection that it can provide. Use it in conjunction with insurance. If the LLC is holding a long term asset, like a rental, then (in most states) you absolutely want more than one member of the LLC. Again, additional protection. This of course means that you must file a partnership tax return. More accounting costs. So here are solutions that I provide clients all over the country.

1. If your state allows Series LLC. Use that. It separates the liability within a single entity. Its also allows one bank account. There are some special hoops to jump through but we provide education to our clients on how to run a series LLC.

2. If your state doesn't allow series, and you have multiple properties, or are planning on multiple properties and want to separate out the liability (recommended), set up a Holding LLC with multiple members (like you and a spouse, it will file one tax return). Then set up an individual "child" company (wholly owned by the holding LLC) for each property. These child companies will not file a tax return but will separate out the liability. This, of course, means a lot of bank accounts, and legal fees. But will cut down on accounting fees.

3. Final option, and one I recommend for newer RE clients, is set up one multi-member LLC and put your first property in it. Learn how to run it properly. Then stick your second one in when you get it. As you go down the road of investing, keep meeting with your team (Attorney, CPA, Insurance agent, etc), and make changes as you progress. You can (AND SHOULD!) always make changes to your business model as you progress in in real estate and your business grows. Nothing wrong with that.

I can tell you there are lawyers who will sell you on BIG packages of tons of different entities that you may not need starting out. Also, make sure a lawyer (not a CPA) actually sets up your LLC (a CPA cannot create an operating agreement or they'd be practicing law without a license). And make sure the attorney truly understands RE investing!! Don't go with just a corporate attorney. And ASK QUESTIONS!

Hope that helps and happy investing!

Jeff

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