Posted 3 months ago

I Have Multiple Investment Properties. Should I Use Separate LLCs?

Clients frequently ask me about how they should hold their investment portfolio – should they create a separate limited liability company (LLC) for each individual investment property or simply hold all of the properties in one LLC? It is a good question to ask, and a good problem to have, meaning you have a lot of properties to have to address this specific problem. Here is my answer: It depends on how adverse to risk you are, but at the minimum I would suggest creating a few LLCs if you have ten or more properties.

From a strictly legal perspective and to minimize potential liability if there was a lawsuit, the solution is to hold each property in a separate LLC. This way, if a tenant at a specific property slipped and fell, the proper defendant is the one LLC that owned that particular property, and the maximum exposure is the asset of that one LLC – the one property. Conversely, if all properties (for example, 10) were held by just one LLC, a plaintiff could go after all of the properties to satisfy any judgment. Therefore, holding each property in one LLC limits liability if there is a lawsuit.

However, while the separate LLCs are the best choice from a legal/liability perspective, from an accounting and administrative standpoint, the multiple LLCs will likely result in higher administrative costs. For example, you will need separate accounting books for each LLC, which will likely increase your accounting fees significantly. Similarly, you pay registration fees each year for multiple LLCs instead of just one. In states like California, such registration fees are very high. Therefore, setting up separate LLCs will mitigate liability, but it will also increase your administrative fees, perhaps significantly.

I recommend that clients determine how risk adverse they are before deciding on how many LLCs should hold their properties. If they are very risk adverse and find increased administrative costs acceptable, then they should create a separate LLC to hold each property. However, if the client is ok with risk and wants to save administrative fees, then perhaps holding the portfolio in one LLC is acceptable.

I typically recommend that clients select an option somewhere in the middle, an acceptable balance between mitigating liability and an acceptable increase in administrative fees. Accordingly, if for example, a client has 10 properties, I may suggest setting up three LLCs, perhaps grouping the properties as property type (e.g. all residential properties will be held by LLC ABC and the commercial properties will be held by LLC XYZ). This way, there is some mitigation of liability exposure if there is a lawsuit, but administrative fees do not increase as significantly. Of course, the option that works best for you depends on how you feel about risk.