Sole proprietor with insurance or LLC living in California

[David Almilli]

I'm just starting out investing rental properties out of state and I keep going back and forth on whether to structure it with a sole proprietor with umbrella insurance or starting an LLC in the state I plan to buy properties in. I live in California so I know that if I start an LLC that it means an $800 annual fee even if the LLC is in another state. At the same time I also watched Brandon Turner's video about the topic which made me think that it might be enough to just get insurance to cover any lawsuits. I own my own home and have one rental property in San Diego. If I end up buying many units over time it might make more sense to have 1 or more LLCs. What are your thoughts on it?

David

[Katie L.]

@David Almilli

There are several considerations that can go into the analysis of whether you need an LLC or whether a large insurance policy will suffice. Will depend on several factors like the type of property, type of tenants, your risk tolerance, other assets you own, your estate planning, laws where the property is located, etc.

Any lawsuits would be limited to the assets of the LLC and not your personal assets (assuming you run the LLC appropriately and the corporate veil is not pierced). But, an LLC will not limit you from liability in total. You can still lose your investment in the LLC. If you're going the umbrella insurance route, make sure it will cover you for several things including just the routine slip and fall (like mold or earthquake). You'll also want to ensure you have a good property manager to look after the upkeep of the property if you are not there to notice anything deteriorating or which may need attention.

Creating an LLC in California would cost you a minimum tax of $800 every year. You would have ongoing filing requirements with the State and would need to keep business records and documentation.

You also want to look at whether a pass-through entity helps your bottom line and your taxes. There is a new 20% pass through deduction you may qualify for that could help you, but not everyone qualifies. You should still be able to get this even if the properties are not in an LLC, if you qualify.

These are all things you will want to discuss with your attorney and CPA. If you need references for either of them in San Diego, let me know.

*This post does not create an attorney-client or CPA-Client relationship. The information contained in this post is not to be relied upon. Readers should seek professional advice.