LLC Or Sole Prop

[Zlata Ishk]

Hello. When purchasing my first investment property, is it better to create an LLC or go with sole prop? Also, are banks more likely to lend to businesses or individuals? Thanks for your feedback.

[Dwayne Ramsey]

Hi Zlata Ishk,

When deciding between creating an LLC or operating as a Sole Proprietor for real estate investment, there are several factors to consider:

LLC (Limited Liability Company):

*An LLC is a type of business entity that allows you to buy, sell, and rent out real estate separate from yourself as an individual.

*If something goes wrong, you won’t be held personally liable—your company will.

*More than one person can be a member of a real estate LLC, giving you the chance to own properties with multiple other investors.

*The main benefit of an LLC is that it limits your personal liability.

*However, setting up an LLC requires upfront paperwork and costs.

Sole Proprietorship:

*With a sole proprietorship, you don’t have to file any legal paperwork or create a formal business structure.

*You’re the only person involved in the business, so you’ll be in charge of purchasing and managing all of your properties.

*The trade-off is that sole proprietorships don't offer anywhere near the liability protection of an LLC.

*There is no separation of your personal and business assets like with an LLC, meaning you could run into big trouble if someone makes a claim against your property.

As for lending, banks generally offer loans to both businesses and individuals. The approval process for business loans is largely based on the business’s financials, including revenue and outstanding debts.

Applicants may also have to describe the purpose of the loan funds. Banks are more inclined to offer larger loans since borrowers generally have strong credit scores.

However, getting a business bank loan is by no means guaranteed. Big banks approved only 13.5 percent of small business loan applications in April 2023.

In conclusion, whether to form an LLC or operate as a Sole Proprietor depends on the specific circumstances and risk tolerance of the investor. It's recommended to consult with a legal or financial advisor before making such decisions.