LLC yes or no for rental properties?

Question

Just starting out in Illinois from what we have figured out so far I think setting up an LLC is best and pretty simple. Thoughts?

Natalie Kolodij · Answer

Tax Pro Here-

SMLLC offers zero tax benefits for your rentals.

Also 90% of peopel don't keep books/separation well enough to not pierce the corporate veil intact with LLC's.

Andrew Freed · Answer

@David Shuman - Good question! I think it is all situationally dependent. Let me explain...

The entire purpose of a LLC is to protect your assets. If you are new and have very little assets, what is there to protect? The other alternative (which I do on all my properties) is ensure you have at least 1 mil liability coverage on your homeowners insurance policy. In addition, if you want more coverage, get an umbrella policy that may add 1-2 more mil onto your liability. These insurance products will protect you from most large claims without the need for a LLC initially.

The issue with LLC's is they are expensive to keep active and are more administratively burdensome. They make sense once you start accumulating assets to protect. But in any event, insurance and LLC's serve a very similar purpose, asset protection. You should eventually utilize both of these strategies once your portfolio starts to build. I hope this helps.

Joe Martella · Answer

A single member LLC is a disregarded entity.  As for the taxes, there is a thread that was created by a CPA.  Maybe you can get your tax answers there.

Ask me (a CPA) anything about taxes relating to real estate (biggerpockets.com)

Tyler Peitzmeier · Answer

@David Shuman

Hey David,

This seems to be a controversial topic as some people believe you don’t need one, and others believe you do. I am in the belief that absolutely you should set up an LLC. From a tax perspective, legal protection and ease of business, I prefer it. Also, if you are looking to scale and purchase many properties and units, you’re going to have to set up an LLC so you might as well just set it up right from the beginning.

Hope that helps!

Tyler

Christopher Smith · Answer

Provide a reliable full citation that proves your referenced "stat". I've been a landlord for 25 years+ and have known many others personally (probably 20 or 30 more), 0% of them have been sued as I have specifically asked them. Perhaps I just hangout with a really really really responsible or lucky group of guys or maybe that "stat" is just another Mark Twain special.

George Skidis · Answer

My thought is yes. An LLC can be whatever you want it to be from a tax standpoint. An LLC can be treated as a disregarded entity and taxed as a sole proprietorship. It can also be taxed as a partnership (not my recommendation), an S-Corp (great if you are making money) or a C-Corp.

From a liability perspective it can also give you something equivalent to a corporate shield even if is is taxed as some other entity.

Personally the properties are owned in Land Trusts and the mobile homes are owned in Property Trusts. The LLC owns nothing it just leases the property, with the right to sub lease. That way if a lawsuit if filed against the LLC it owns nothing but the checkbook.

Megan Templeton · Answer

Hi there! Stats say that if you are an investor for more than 10+ years, you have a 90% chance of being sued at some point. For long term investors, its not so mcuh of if you will be sued, but when. While insurance is a good first line of defense, it is not conclusive. Insurance companies are a business and inside of that looking to mitigate costs. In doing so, they will often find reasons to not pay out on a claim. If thats the case for you, you want a true line of defense in a lawsuit - thats where an LLC comes in. An LLC separates you from your business so that if your are sued, your personal assets arent at risk. Using an LLC not only provides liability protection but can open up opportunities for you for working with 3rd parties such as lenders or partners who require an LLC. If your LLC is set up correctly, the operations and financial pieces of it can be minimal and easy to manage.

Steve Vaughan · Answer

'Setting up' an LLC is really vague.  I'd have an entity as a holding co to manage and represent my rentals, sure.

If you mean owning RE inside an LLC, my research has brought me to this.  Depends on asset type.

Since most are hoping for 30 year fixed rate GSE mortgages only offered to natural persons- a home or residential asset up to 4 units = no LLC.

Insurance will offer you $500k in liability protection for 10s of dollars a month on these.  You can also get an umbrella policy.  Fear is usually just false evidence appearing real.

Commercial, retail, industrial, self-storage, etc = yes LLC.   You'll be dealing with commercial loans and insurance anyway.

What type of rentals are you hoping to own?  That should drive your decision.

Natalie Kolodij · Answer

Rentals should never be held in an S/C corp.

LLC yes or no for rental properties?

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