3 Benefits of Holding Your Properties in an LLC

by | BiggerPockets.com

Let’s talk about what an LLC is and what it isn’t. An LLC is not equal to a get-out-of-jail-free card. You can be sued with an LLC, and you can still lose everything. An LLC is not designed to prevent you from ever being sued. An LLC is intended to help you manage and contain the fallout from such a lawsuit. According to the United States Small Business Administration (SBA), a limited liability company is “a hybrid type of legal structure that provides the limited liability features of a corporation and the tax efficiencies and operational flexibility of a partnership.”

Given this definition, an LLC’s benefits are threefold.

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3 Benefits of Holding Your Properties in an LLC

1. Limited Liability

If you were to get sued, your liability (the damage to your wallet) could be contained to the assets within the LLC, not everything else you own. In other words, if the LLC is set up correctly, and you get sued and lose, the creditors probably would not be able to take your personal house or car, or garnish your W-2 job wages. Or course, there are ways a judge might “pierce” the protection of an LLC and go after these things if every I is not dotted and every T not crossed.

great-deal

2. Tax Efficiency

The LLC is fairly easy to handle during tax time, especially if it is a “single-member LLC,” which means an LLC owned by just you or by you and your spouse. LLCs are known as “pass-through entities,” which means the income and expenses flow magically through the LLC and are reported (and paid) by each individual member on their personal income statement.

There is no “corporate tax” like a corporation might pay. This can definitely make taxes easier and less expensive than for, let’s say, a corporation. That said, although a single-member LLC does not require its own business tax return, a multimember LLC does. Don’t make this mistake.

3. Operational Flexibility

Finally, an LLC is fairly flexible in terms of running it. You don’t need thousands of documents or to issue stock. An LLC can be set up fairly easily and inexpensively and requires just a few documents.

It’s easy to see why an LLC might be advantageous to a real estate investor. Let’s say a tenant slipped on the stairs and broke their hip. The tenant decides to sue the landlord for “neglect,” and the court sides with the tenant. For whatever reason—let’s say your insurance doesn’t cover all the legal penalties—you, as the owner, are required to pay $500,000 out-of-pocket to the tenant. Ouch. If you own the property without an LLC, the tenant could have your wages garnished, force you to sell all your properties, and drive you to bankruptcy. You could end up eating cold beans out of a can under a bridge while pigeons sit on your shoulder—not a fun place to be.

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On the other hand, if the owner of that property was “Main Street Investments LLC” rather than you personally, then the LLC would be the entity getting sued. The courts could make you sell that property, or other properties owned by that LLC, but they likely wouldn’t be able to make you sell other properties owned by other LLCs, if you have them. They won’t take your primary residence. You won’t be eating cold beans. Sorry, pigeons.

Of course, this example is a bit overdramatized and unlikely to happen. And I don’t actually mind eating cold beans. But it illustrates the fear that drives most investors to pursue an LLC. Even though it may sound like I’m encouraging you to establish an LLC, remember that there are still cons to doing so; it all depends on your personal situation.

Do you use an LLC for your real estate business? Why or why not?

Let me know with a comment!

About Author

Brandon Turner

Brandon Turner (G+ | Twitter) spends a lot of time on BiggerPockets.com. Like... seriously... a lot. Oh, and he is also an active real estate investor, entrepreneur, traveler, third-person speaker, husband, and author of "The Book on Investing in Real Estate with No (and Low) Money Down", and "The Book on Rental Property Investing" which you should probably read if you want to do more deals.

31 Comments

  1. michael griffin

    So let me ask you this. Would you suggest opening LLC’s for each individual property you own? Or maybe grouping a few properties together then opening another for the next few to protect from anything like this happening? I worked for a company who incorporated each office separately for this exact reason. We then opened up a truck leasing company to lease the trucks to the companies and a parent company to do all the loans. Breaking down a huge company into lots of little entities for the sake of being sued as we had lots of vehicles on the road. Seems like it would make sense to have an LLC for each project

    • Keith Willey

      This would depend on your risk tolerance. Many investors like to keep each LLC to not more than $200K or so. If this means 2 properties or just one, it limits the liability to $200K. This assumes you own the properties outright. If you are leveraged, you could have even more properties in each LLC and move them to other LLCs after you build equity.

      Another option is also to hold additional umbrella insurance. This will help with liability and is generally not too expensive.

  2. Mike, there are states with what are called SERIES LLC’s, which allow you to form one LLC and separate on paper the entities contained within- we have done that in Texas , but to be on the safe side we limit the value of the entities to 5 million dollars then we start another series LLC.
    Another great advantage of holding property in an LLC is that i can sell the properties with 2 signatures at my lawyers office, no public filing of anything if its a cash sale / trade. No one knows you sold anything which keeps the tenants fears away. When you look at the massive industry the title companies and real estate offices have built to suck money off you its incredibly refreshing to do LLC deals! !!!!

      • ryan tatro

        I believe he is talking about selling the LLC. I am a commercial lender and I have seen this done. The LLC owns the property and you sell the company. The company retains ownership of the property but the owners of the company have changed.

        Also, he states that this is with cash deals. However, I have financed such transactions. From a buyer’s perspective, a title search is still good to get to be sure any debt on the property is being reported on the company balance sheet. I could see a shady seller “fixing the books” so good due diligence is a must.

        Dave, correct me if I’m wrong.

        • Kevin Lefeuvre

          Genius! Thanks Ryan. Makes sense. In this case, it’s a Stock Purchase contract, and in fact you don’t even “technically” need an attorney. If you know corporate law and have experience buying and selling companies. Just a cashier check and shares certificates signed together with a purchase agreement.
          Got it!
          Now I wonder why we don’t see more of this.
          Also, I wonder if there is not a tax benefit on top of the ease of transaction: Instead of going through the painful restrictive 1031 exchange program to avoid capital gain, you may be able to deduct “management fees” (money that the LLC has paid it’s owner for management over years), just like a CEO’s salary, so that you don’t pay capital gain tax. Does that work? Ryan and Dave you are opening my eyes.
          Ryan, how’s lending criteria changing when funding a LLC instead of a direct RE? Is it automatically gonna be a commercial loan even if the LLC carries jus tone SFR?
          PS. Fully agreed on title search. I have a friend working at a title company where I always get a preliminary report before putting money in escrow.

        • ryan tatro

          Kevin, yes, this would automatically be considered a commercial loan. I have only done this when I knew both parties and the property very well. I doubt I would consider it otherwise. The due diligence is similar to a “normal” commercial loan with some added risk/items to be aware of. A big one is what liability risk has the seller opened the company up to over the years?

          In addition, you have to be comfortable with how the seller structured their deals and the company. While you can change the Operating Agreement you cannot easily change the title policy (at least not here), depreciation already realized (the properties may be substantially depreciated), branding issues, etc. These may not be deal killers but some extra due diligence is needed.

          Just remember, you are not getting a clean slate, the company has a history.

          It would be great to hear from someone who has done this themselves. I would like to hear about what due diligence they performed and how the process went.

    • ryan tatro

      If you are talking about house hacking the only reason I could see not using an LLC in this situation is for financing reasons. You can purchase a 1-4 unit building with conventional financing which gets you a low fixed rate. Though there may be other reasons I’m not thinking of.

      • Christopher Fernandes

        Thanks Ryan. That makes sense. I am a vet looking to use my VA loan for my first MFH. I will indeed be house hacking and will within a year or two refinance into a conventional loan in order to use my VA loan on another property. Using the VA loan would make it so I can’t purchase with an LLC. Is there an effective way to transfer ownership to an LLC when/after I refinance?

        • ryan tatro

          You can transfer the property into an LLC whenever you would like. However, be aware that nearly all lenders have a due on sale clause. This means if you transfer the property the loan becomes due in full. Some take the risk and transfer their property into their LLC in hopes that the lender wont find out and if they do they will be allowed to transfer back into their name without a big penalty. They could say no and other lenders may not want to refinance it.

          If you do decide to transfer the property remember to work out the details regarding insures before hand. The original insurance policy will be in your name. You will need to add the LLC to your policy, which may cause some problems. Talk to your insurance company in advance.

          If you keep the property in your personal name I would consider getting an umbrella policy. This will add a higher level of liability insurance (usually in 1MM increments) and its not very expensive.

        • William Morrison

          As Ryan said if you are hoping the lender will not notice or care after you move it you run the risk of the Due On Sale clause being exercised. And if they did not give written permission the whole idea of your LLC protection is probably gone.
          There are many LLC threads here on BP and I’ve gone through many of them over time. This has come up many times.
          So I suggest you spend a dollar or two to consult with a lawyer and not a lawyer selling LLC’s. Consult with one that has successfully dealt with Non-frivolous law suits with LLCs. I did and one of the first thing they said was they include the lender as party to the suit. Then see if you still have a loan and LLC protections.
          One of the other major items for beginners who manage their own property is the work they do on the property personally and if its in anyway part of the problem. They will be individually identified as such.

    • Kevin Lefeuvre

      If the 4plex is all you own there’s no point to put it in a LLC. As this article correctly outlined it, the LLC is not protecting its own assets. It just serves as a barrier to protect your OTHER assets. Many people get this wrong. That’s also why you need one LLC per property. Putting all your properties in the same LLC means you are wrongly advised.

  3. William Morrison

    Only recently did all the states and DC allow Single Member LLC’s. And for some it is a different filing from the LLC. It’s a SMLLC.
    I have properties in both LLCs and not.
    If you’re leveraging the property the interest rates will likely be higher and the terms (years) be shorter. At least I have found that to be so. And it can be a big deal on the cash flow break even point.

    Just do a search on “Single Member LLC’s By State” and you’ll see several web sites tracking the subject. Like the different creditor/charging order rules and “piercing the corporate veil” rules. Also your operating agreement filed with the state should be specific.
    I keep up on it because I opened one or more in a state using a local lawyer who “specializes” in LLCs (recommended several other successful investors). And found out after the fact what it did not provide at the time. The state did not recognize Single Member LLC’s when they were formed but does now. I was not so happy with the Lawyer.

  4. Noah Scott

    What opportunities are available to transfer property from personal ownership to holding in an LLC? I am planning on having my first investment as an MFH house hack. I plan on going the FHA loan route and as I understand this would not be available to an LLC.

    If say 2-3 years down the road I refinance that property, would there be opportunities available at that point to put the property into an LLC?

    I remember hearing Scott Trench mentioning refinancing his MFHs in his podcast appearances and if memory serves, he talks about it in “Set for Life” as well; however, I am curious as to what opportunities are there to transfer property at that point.

    • Ronald Rohde

      There are plenty of exclusions to even an umbrella policy. There is also a repeatability problem if you keep making claims on your personal policy either the premium will go up and exceed any interest or annual costs or you won’t be insurable at all. With LLC protections, you can dump them as often as needed.

      • Eric C.

        Anything specific examples you can share? The example from Brandon, the typical slip and fall would be covered. Also, in the slip and fall example, you would lose the house and nothing more if in a LLC. With Umbrella, you would be covered and keep the house. Still trying to understand the true benefit of a LLC.

    • Kevin Lefeuvre

      Melissa, this is a great question. I have marked it down to ask a lawyer. I think also that the biggest liabilities are in the property management, so if they can be ported by the PM, owner’s LLC, then most liability issues are solved. Best part is that in this case the LLC does not even need to own anything. It’s just an empty shell company with no assets.

  5. Andrew Hodgson

    Brandon, you really need to have attorney, author, and RE investor Clint Coons as a guest on the podcast. Last I checked, he is on BP. His team built my entity structure, and not only can I buy rental real estate in my own name and then assign it to a LLC for anonymous asset protection, but I can also take it out of my LLC whenever I want to sell or refi, without clouding title. Best of both worlds.

    Even if the BP community only gets to hear the general concepts from Clint Coons, because BP can’t risk giving specific legal advice of course, it would still be extremely helpful. As you can see by all the replies to your post, this is a topic that we all care about, and have many questions about.

  6. If you have a mortgage the best way to handle it is by putting the property in a Land Trust. Most states allow you to put a property in a land trust and not effect mortgages. After you have done the land trust in your name you reassign your beneficiary interest of the trust into an LLC. You can easily transfer the beneficiary interest without the need of a lawyer. If you then can also sell the Land trust if you want and still retain the original LLC. If you have several properties you can have 2 LLC’s and if you are afraid one might get sued you can reassign the all but that one Land trust to the other LLC. Or how I do it is I hold each property in a Land Trust (both owned and mortgaged) each land trust has its own LLC which is then owned by another LLC in Nevada which doesn’t have charging rights. I can do this because Colorado where I have most property it is very cheap to have an LLC, I would not do this in California because LLC’s are expensive to maintain.

  7. Javier Urena

    Brandon,

    Great article for a beginner such as me but I wish you would have just touched on briefly in a sentence or two about the cons of forming an LLC. I know this article is about the benefits but I felt like you left me hanging there by mentioning that there are cons and we should beware. Nevertheless, it motivated me to dig in deeper into the cons.

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