Are there any big advantages to forming an LLC?

Question

I am looking at buying a 4plex in the next few months and have been debating what to do.

I have read that some people form an LLC and some people don't at all.

A friend of mine suggested I need to form one for tax purposes and it takes the liability away from my person assets.  Also something about a reduced tax rate.  My gut tells me he is wrong, but I am no expert.

What are the advantages of forming them? I don't plan to own 50 properties but maybe 10 or so.

Erin A. · Answer

What @Ned Carey said!

And, also:

1. The private lenders I have worked with and spoken to will only lend to LLCs or other entities (with a personal guarantee, of course).

2. LLCs help you cluster and organize your risk. You may wish to establish various LLCs for different types of property (apartments, offices, etc.), different cities/regions, or to separate different groups of investors.

3. Not sure what the LLC tax climate is like in MN, but here in CA each LLC must pay a *minimum* annual tax of $800. For example, it doesn't really make sense (in my opinion) to put a small multifamily property cash flowing at $3,000/year into a California LLC.

Ned Carey · Answer

You absolute do NOT need to form one for tax purposes. An LLC can provide some liability protection but if it is a single member LLC it probably wont' provide much protection. An LLC is harder to finance than buying in your personal name.

This is a complex issue. If you dig in detail you will find that on average, especially for a single member LLC the disadvantages out weigh the advantages. Yet i would not own a property without one and neither would any attorney I know.  There are many threads here on the issue and you may want to check out the NOLO Press website of purchase some of thier books.

Ned Carey · Answer

I want to limit my liability as much as possible. An LLC may stop a bad attorney. It is possible to penetrate an LLC but that doesn't mean it will happen. There is also a difference between being new with no assets and doing a deal or two, and being a full time business that does dozens of deals a year

Brent Paul · Answer

I will be financing with a bank loan.  I would love to pay cash but I don't have the capital right now.   I have an investor lined up to partner with but he's tied up in a house flip right now.

I am stil a little confused about the llc but it's starting to make more sense now.

I can see why it makes sense to separate each llc for each type of property.

Spencer OBrien · Answer

@Ned Carey

Why wouldn't you own property without an LLC? You said the disadvantages out weigh the advantages? I too have contemplated setting one up as I own two rental properties as of now and plan on adding at least one a year to my portfolio.  My understanding is they can still penetrate the LLC's protection as I am the sole manager of the LLC. Is this true? Can you shine some light on this? Thanks!

James Wise · Answer

@Brent Paul an important question about this 4-plex and whether or not to get an LLC is how do you plan on paying for it?

Cash?

Bank loan?

Are there any big advantages to forming an LLC?

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