Originally posted by Brian Burke:
The time you really NEED to set up an entity is when you are acquiring property with others, such as an equity investor (not a debt investor) or a partner that would go on title. Another time would be if you are going to hire employees.
Aside from that, I see little value in an entity for basic investments such as SFR and small 1-4 residential. If it makes you feel better to have an entity because you have a certain net worth, then you should do it. It may or may not add any practical protection, but there is value in taking comfort that you have taken every measure to provide yourself with multiple protection strategies.
@Brian Burke
You made some good points I agree with as far a land-lord tenant exposure and risk I see as low too. Lots of non LLC history out there, little LLC case law, so whom is really to say? Time will tell.
You missed another form of asset protection lawyers love too, bankruptcy, different for sole proprietor vs LLC. From what I read federal and most, not all, state laws favor keeping company's alive especially with employees. One would be hard pressed to find a recent case in their state LLC vs Tenant, but yet LLCs grow in popularity based on legal theory attorney's like to sell.
A partnership or multi-member LLC in theory has more protection since if a charging order is awarded or foreclosure on a member's interest it won't wipe out an LLC where it will a SP or could easier. I have read cases where charging orders can act as members and if there is just one it is easy, some can manage distributions, some can not, depending on state statues.
If you are in a corporate friendly state with judges and no juries like DE, NV, WY, low filing fees, tax advantages, no foreclosure laws, etc, it's a no brainier.
If you are in one of the 9 states that see series LLCs as separate entities, where the master holds assets, series 1 is a management co that manages your and/or other properties, series 2 a construction co that manages your subs and/or others, 3 a rental property, 4 a rental property, 5 a flip, etc. You have the flexibility of CLP/WC insuring the high exposure entities like the management co and construction co, and lower cost insurance for the rental LLCs. If you can find an underwriter to insure them cheap. Other nice thing about series LLC is the head quarter master holding co can be in DE, NV, etc, with a series rental in your state that does not have series LLC statues, then the confusion really starts ;) My state just became the 9th and does not state tax pass through income, just W2 so I am heading for the structure above.
You can see here one could build an Enterprise where profits far offset the cost of asset protection. And that can happen rapidly if you know how to manage companies, legal and accounting structure. In some cases getting asset protection from the start makes sense.
