Starting Out with or without a LLC/SCorp???

Question

Good morning,

I am seeing a lot of reference about LLC and my business being thrown around.  Before i get started with my first investment property should i start a LLC or S Corp.  What do you gain by doing this?  Does it help with taxes?

I appreciate anyones time that would explain this part of real estate investing to me.

Jaron Walling · Answer

@Gunnar Brown You DO NOT need an LLC or S Corp before buying an investment property. If anything it limits your lending options, costs you money, and slows you down. It does nothing for taxes when starting out.

Once you own multiple assets (units), tenants paying rent (liability), and have good equity (net worth) it's a different story.

Evan Polaski · Answer

@Gunnar Brown, the real answer is talk to your attorney and tax advisor.

But the general idea of either is to LIMIT YOUR LIABILITY, specifically any personal liability.  When you buy a property, you could have someone walking in front of your house when a tree branch falls on them from your property, causing them to go to the hospital.  That is your liability.

When you rent it: your tenant trips walking up the stairs and breaks an arm.  That is your responsibility.

But no good deed goes unpunished.  You can buy in an LLC or S Corp, which, when done correctly, will keep all that liability in the LLC.  Therefore, the pedestrian or tenant cannot come after your personal bank account or your other assets, BUT it means more paperwork, more expensive loans, more expensive insurance, etc.  Possibly more expensive income taxes.  So you need to figure out where the balance is in shielding risk versus costing you more money and effort.

Nathan Gesner · Answer

Putting property in an LLC will not make you a better investor or smarter Landlord. Too many beginners spend all their time and money on wasteful nonsense like setting up an LLC, building a website, buying business cards, etc. You need to focus on acquiring good property and learning how to manage it well. Act like a big shot when you are a big shot. I had well over $1 million in assets before I even considered setting up an LLC.

An LLC is useful for two things: anonymity and legal protection. In most cases, neither is warranted.

Warning: I am not an attorney and this can be a complicated topic. Please note the information provided below is a layman's definition designed to provide a basic understanding for the general audience. You should consult an attorney or CPA for your specific situation.

ANONYMITY: When you create the LLC, your name is recorded on the documents and published on the Secretary of State website for all to see. So you're not completely anonymous. If you want to be completely anonymous, you can use a Registered Agent. The Registered Agent will record the documents on your behalf so only their name and information appears on the documents. I've done this with my properties because I'm well known in my small town and don't want people to know what I own.

LEGAL PROTECTION: By placing your assets in an LLC, you are legally separating them from your personal assets. If someone injures themselves and sues, they will be suing the LLC and not you personally. If your insurance coverage isn't enough, they could seize the LLC assets, but not your personal assets.

Additional thoughts:

1. An LLC is not free. You can spend as little as $100 to form an LLC, or you could use an attorney and spend $1,000 or more. There are also additional costs of operating and maintaining an LLC, like separate bank accounts, annual report filings, tax filings, etc.

2. There are rules to follow! If you fail to follow the rules, you may open your personal assets to a lawsuit. An example of this would be mixing your personal money and LLC money in the same bank account.

3. You do not need a separate LLC for each property or a series LLC! Don't make your life more complicated than it has to be. Most professionals will recommend a separate LLC for every $1 million in assets but I don't think that's necessary. In my case, I have residential rentals in one LLC, commercial properties in another, self storage in a third, and my real estate company operates in a fourth. Some have more than $1 million in equity while others have less.

4. The need for an LLC is grossly exaggerated on BiggerPockets and other websites. Have you ever heard of a Landlord being sued by a Tenant and losing property? I've been on this board since 2010 and haven't found an example yet. You've probably heard of big Landlords losing property, but only because they were flagrantly violating Fair Housing, running a slum, or otherwise violating the law in an egregious manner. You are more likely to be struck by lightning twice. The vast majority of lawsuits against Landlords are for wrongful eviction, security deposit disputes, and Fair Housing Violations. Your basic insurance policy with $300,000 in liability coverage should be sufficient in 99.999% of all lawsuits.

5. The best protection for you and your investments? Know and obey the law. I manage around 400 rentals with 12 years experience and have never been sued once. Even if I were sued, I document everything and obey the law, so I won't be found guilty. Even if I were found guilty, the cost would be in the thousands, not in the millions. Insurance would cover it, I would pay the deductible, and no assets would be lost.If you are in an area like San Diego where people are more likely to sue, a judge is more likely to find you guilty, and the payout is likely to be higher, then you may consider an umbrella insurance policy. This policy will provide additional coverage above what your existing policy covers. It's easy to obtain, costs very little, and doesn't require additional, on-going effort to maintain.

Amika B. · Answer

I agree with Evan... speak with your attorney or tax advisor.

That being said I'd highly recommend starting an LLC as this limits your personal liability. It's just an added protection that I would not skip!

Eliott Elias · Answer

Talk to a CPA. Spend more time looking for deals.

Gunnar Brown · Answer

Lets say i wait on forming the LLC/SCorp and i obtain some properties.  If i do form a LLC/SCorp later would the company be able to purchase the properties i have obtained to give that extra shield or would it only be able to buy future properties?

Starting Out with or without a LLC/SCorp???

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