LLC's, Are they necessary in investing?

Question

I know the basics of what an LLC is used for, but I had some clients today asking what the major benefits I've seen so far with investors using an LLC. What can you say about having your investment properties under an LLC versus not using one at all. Just looking for any additional information I can provide to newer investors.

Thank you!

Eddie Brady · Answer

@Atta Bari that depends on if you are a sole proprietorship (single member) LLC or are in a partnership.  For single member sole proprietorship LLCs, the LLC is seen by the IRS as a disregarded entity and also a pass-through entity. You file everything on your personal returns.

So in that case, no there are no additional tax benefits. The tax benefits come from where the income is generate and your eligible expenses.

I highly recommend talking to a CPA. I'm am not an tax expert. I have a single member LLC myself so my knowledge is limited to that area.

Jonathon Weber · Answer

With an LLC there is informational tax return because it is eligible for pass-through income taxation. Pass-through income taxation allows LLC members to tax any business income through their own personal tax rate, rather than the corporate rate. This can be beneficial depending on the personal tax rate of LLC members compared to the corporate tax rate.

Atta Bari · Answer

@Jonathon Weber@E Brady Are there any tax-related benefits of LLC?

Eddie Brady · Answer

@Madison Theiss the benefits are in the protection of assets.

Investors use LLCs and Series LLCs to protect one investment property, or group of properties, from a lawsuit of another.

Look at both possible scenarios. Let's say your client has two properties, let's go with 123 Main St & 456 Maple St, which are owned by your client in their personal name. Then 123 Main St has a tenant who slips and falls down the stairs. They decide to sue the owner, your client, for a large sum. That tenant would also be able to come after all other assets owned by your client, including 456 Maple St and your client's personal assets, to settle the lawsuit.

The other scenario is having 123 Main St in it's own LLC, and 456 Maple St in another separate LLC. In n this case, the tenant who Sue's the assets of 123 Main St is only able to sue and come after the assets of that single property. 456 Maple St and your client would be safe, assuming they structured the LLC properly.

If they decide to form an LLC, I personally recommend using a Series LLC if their state allows. I am not an attorney and I recommend your clients contact one for information on forming a business entity.

Jonathon Weber · Answer

If you have business partners or employees, an LLC protects you from personal liability for your co-owners' or employees' actions. An LLC gives you a structure for operating your business, including making decisions, dividing profits and losses, and dealing with new or departing owners. An LLC offers taxation options. Most LLCs are taxed as a sole proprietorship or partnership, but LLCs can also choose S corporation or C corporation taxation.Without an LLC or other business entity, your personal assets are at risk if your business is sued for something a co-owner or employee does.

It is a good idea to start using an LLC when any of the following occurs.

• You want to buy residential properties with cash and you do not intend to refinance down the road.
• You want to buy residential properties using cash but not all of it is your cash. You are buying properties by pooling your cash with that of other partners.
• You want to buy commercial properties using cash or commercial financing. (retail, industrial, 5+ units etc...)