To LLC or not to LLC?

[Jases Brown]

RIght now we have a grand total 1 rental property that we bought a few months ago.  At what point do you guys start putting properties into corporations?  What do you base your decision to do it on?

BTW, we do plan on adding 2 or 3 properties over the next 5 years to buy and hold.

[Scott Smith]

Hi James, congratulations on your rental property! There are many different factors that go into building an entity structure, or not. My answer here will mainly be focused on asset protection, but it wont go into detail on insurance or taxes. When I sit down with clients I discuss (1) what their personal assets are, (2) what their current investments are and (3) what their future intentions are. The piece that would sway me from one recommendation to another is what your personal finance situation is - adding an investment property in your personal name is basically leaving a business card to any liability that it can create. Insurance is a good option, and I always recommend it to start with, but I kicked my career off litigating big insurance companies for refusing claims - so I never rely on them as my only form of defense.

I often break it down into the "four pillars" of protecting your assets. The first pillar is a good insurance policy as that cover the majority of your exposure. However, it only protects you from one type of liability: accidents.

After that you want to compartmentalize your assets, which is often accomplished through the use of LLCs or corporations. I personally find the Series LLC to be a great tool for the individual investor who is planning to expand their operation, as it allows for you to scale infinitely - check out this article to learn more. The third pillar is somewhat similar - you want to separate your operations from your assets. That means you establish a Traditional LLC to carry out the operations of your investments, in order to separate the liability from your assets, including: paying property management, paying contractors, collecting rent, marketing, etc. Finally, with the use of Trusts while establishing these structures you can add a level of anonymity by removing your name from public record.

Each investor is different in what risks they are willing to take. I just encourage you to talk with an attorney about what exposure you face and what it costs to protect yourself. To be pretty honest, all you need is better protection than the next guy... Attorney's are looking for easy money, so if you can even implement a basic strategy [correctly] then they will often move on to an easier case. Attorney's often have options, and make their decisions based on business practices, too - usually.

This isn't legal advice, simply my opinion as an investor.