LLP or LLC in Pennsylvania?

Question

Hi, BP, it's my first time posting but I'm hoping to get input from anyone investing in the Pittsburgh area (or PA as a whole).

My husband and I are just starting out and we're trying to decide on the best entity/structure. We've been doing consultation calls with local lawyers and almost all suggested creating a "parent" LLC, and then creating "sub" LLC's for each property my husband and I purchase. But one suggested creating an LLP as the "holding company" instead, (with me and hubs as a single limited partner, and an LLC we create as a 1% general partner).

I'm wondering if anyone in PA is familiar with a structure like the LLP suggestion, and what might be the pros/cons of going that route? Specifically, I'm wondering about taxes. Thanks for any insight!

Mindy Jensen · Answer

This seems overly complicated if you're just starting out.

Alex Deacon · Answer

@Jacquelin Featchurs Just create a simple LLC for now. Dont over complicate things. You just want to insulate your personal assetts from the LLC assetts in case of litigation. Once you start to accumulate more rentals in the Pittsburgh market then you can start to form different entities etc... Find a good attorney and let them prepare and record the LLC docs. PM for a few very good Pittsburgh real estate specific attorney that I deal with on a regular basis. @Mindy Jensen is 100% on point. Keep it simple.

Basit Siddiqi · Answer

@Jacquelin FeatchursI agree with what the others have mentioned. The structure is overkill.The attorney's that suggested that to you have an incentive to provide you a complex structure1) they bill you hourly and for the setup of each entity.2) There may be annual upkeep of every entity(again which you would pay them for).

Chris K. · Answer

@Jacquelin Featchurs

I agree with the above posters. LLPs have their place but unless you are working on a big project, I don't think the attorney's fees and costs will be worth it. I also fail to see what benefits an LLP will provide for you guys if you and your husband are the only partners. You could play around with trusts and do all these fancy legal maneuvers. But that would only be appropriate if you already have a serious net worth.

Disclaimer: While I’m an attorney licensed to practice in PA, I’m not your attorney. What I wrote above does not create an attorney/client relationship between us. I wrote the above for informational purposes. Do not rely on it for legal advice. Always consult with your attorney before you rely on the above information.

Jacquelin Featchurs · Answer

I absolutely agree about simplicity! Just trying to make sure we don't create a structure that will come back to bite us in the butt later. We've only been speaking with Pittsburgh attorneys who indicated they were investors themselves, and very familiar with the local market. However, only one of those attorneys specializes solely in real estate, and he's the one who suggested the LLP strategy. But we'll keep looking for the right fit!

Gary Swank · Answer

@Jacquelin Featchurs Several investors have expressed to me that they have looked at both sides of LLC creation from the get go. As @Mindy Jensen and @Alex Deacon have said, keep it simple. Your local attorney should be familiar with the nuances of the Pittsburgh market.

Chris K. · Answer

@Kim Uradnik

Pennsylvania does not have Series LLCs yet. Even if it did, there is still a good amount of uncertainty due to a lack of case law.

@Tom Strong

LP/LLP arguably offers more protection for a limited partner. But if @Jacquelin Featchurs and her husband have any role as a general partner, it's a moot point.

Disclaimer: While I’m an attorney licensed to practice in PA, I’m not your attorney. What I wrote above does not create an attorney/client relationship between us. I wrote the above for informational purposes. Do not rely on it for legal advice. Always consult with your attorney before you rely on the above information.

Steven Ko · Answer

@Jacquelin Featchurs I think the point they are trying to make is the right fit is where you don’t have an llc or llp starting out because it over complicated things.  Do you listen to the podcasts? Brandon Turner constantly calls out people asking this question.  The llc/llp is not the roadblock to you getting started.  Llc/llp are not free and have yearly costs.  If you own one or a few properties, it’s generally not worth it but if your still worried, i heard an umbrella policy is much more reasonable protection.  Then when you get enough properties and you need to protect your empire worth millions, then I’d talk to a tax professional and set up those complicated llc structures.  Just don’t be a slumlord.  And don’t rent to lawyers lol.

P.s. your first two responses are both RE investors, one who is the bp money host and wife of Carl Jenson, a smart cookie, and Alex Deacon, he probably runs one of the largest property management companies in southwestern Pennsylvania.  They may not be lawyers but very credible people.

Bill Goodland · Answer

@Jacquelin Featchurs lawyers over complicate things so you will pay them more time to figure it out for you. Unless you’re worth a couple million already, if you’re just buying a property with your spouse I wouldn’t even bother with an LLC yet

Tom Strong · Answer

I can't speak to the LLP vs. LLC issue, it sounds like something I should be looking into myself for the future as a possibility, but I'm still small enough to not be thinking about reorganizing just yet.

Something to consider, in PA if you are planning to hold your properties in an LLC, make sure that you form the LLC first and buy them within it, as opposed to buying the property yourself and transferring it to the LLC later.  PA, in its infinite wisdom, requires payment of real estate transfer tax even if you transfer a property from yourself to an LLC you own - it might be a pass-through entity for IRS purposes, but the state wants its transfer tax anyway.  Just to make it worse, if you buy your properties in an LLC, then change the ownership of the LLC, you will also owe the transfer tax on that sale too.  Consult with an attorney and tax accountant before you rely on this since I'm neither, but in general try not to change structures once you're set up.

LLP or LLC in Pennsylvania?

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