LLC, S Corp, or C Corp? Partnerships? What is best?

Question

Good Afternoon everyone,

I am a fledgling real estate investor and am interested in hearing the general community's experience/recommendation operating as an LLC, S Corp, or C Corp.  Having some background in finance, accounting, tax, and business law, I am aware of the textbook advantages and disadvantages that each offers and their subsequent financial statement impact, but as far as actual operating ease and efficiency what is the recommended entity for holding these real estate assets?

My initial thought process in creating a business entity that exposes me to the least amount of risk would be to structure a  limited partnership with three parties: my partner and I are personally listed as limited partners (each with 49% ownership of the LP) and an LLC (where my partner and I together are the majority interest) listed as the GP with 2% ownership.  In this way, my partner and I will each receive 49% of the operating income through the pass-through entity (with income, capital gains, etc. individually being managed and optimized through individual tax planning) and the LLC will further offer us indirect control while still limiting our personal liability exposure as it's an LLC.  In the event of lawsuit, the plaintiff/tenant would only be able to sue the LLC, which holds a mere 2% of the partnership assets.  So long as the partnership capital accounts are properly monitored and the bylaws of the LLC are strictly adhered to, I don't see how this could be penetrated.  Any thoughts here? Am I overlooking something?

Thanks,

Mike

Alice K. · Answer

@Steve Vaughan Good to know. I want to keep things relatively simple myself, so will probably do something similar. In the past, the more complicated I’ve structured something, the more headaches I've caused, and interest I've lost.

Thanks for sharing!

Steve Vaughan · Answer

Hi @Alice K. - I don't attract private investors or partners personally.  Sounds like a lot of work :)

My commercial loans for my LLCs are personally guaranteed still, so that'a con I would say. I haven't 'built' my business credit with cc's and such.   I don't use cc's at all.

No other cons I've found placing commercial assets inside LLCs.  It's expected by lenders and insurers, unlike with residential property where it's a surprise and a problem.  I'm just small potatoes but I appreciate you asking!

Steve Vaughan · Answer

I hold title  to my commercial  apt bldgs only in LLCs. Every couple million I establish a new one. Little houses I jjust carry good insurance. I don't fear the 1 in 18.645 million tenant lawsuit as some do though.

To your title question - all responses here are pretty much worthless if we don't know if you plan to flip, wholesale, buy and hold? Residential? Commercial?

Kerry Baird · Answer

Our CPA suggested a C-Corp which manages a series LLC.

Jeremy Hunter · Answer

Hey Michael,

I think you have as a good set up to work with, personally especially with a partner. I have read in a different thread or two people using an entity to buy and sell the property and then using a series LLC under a larger LLC to cover them. I have also read that some people have two entities one as the operations entity and the other one as the acquisitions/holding entity. I know you probably know all this already, but it seems to me that if the person who is setting up your business entity has a decent amount of experience cannot poke a hole in your structure then it is a good structure. I know that one or two of the BP podcasts talk about business structures - podcast 165 the guest talked about how she and her husband have their entity(s) set up was a recent one that I was just replaying this week.

I am no expert but that is my two cents. At the end of the day always ask someone smarter, right!! Lol I hope that you get your answer I am curious as to what else has to be said.

Kerry Baird · Answer

Yes.  Our C-Corp manages a series LLC, with one house per cell in the series.  We use private money loans in this endeavor instead of any commercial or conventional financing.

We had looked for a portfolio lender, but the 30 year product we first looked at is no longer available, for starters.  For another, the cost of appraisals were up there.  The private funds are very flexible.  We are going to continue rolling forward with our debt snowball, using private funds.

Alice K. · Answer

@Kerry Baird Have you happened to go the C-Corp route? If so, how has traditional lending been / ownership? I assume it's a boat load of paperwork? Would love to hear any wisdom you have on the topic.@Steve Vaughan Do you attract private investors or go to banks with new LLCs? Curious about any pros / cons you've personally found with LLCs that you didn't know before going that route.

Cheers

Michael Johnson · Answer

@Steve Vaughan do you hold each property within its own, individual LLC? Or do you hold them all within one? I'm worried that by holding them all within one, one might be leaving the backdoor open whereby a litigating tenant with a big enough claim in one particular unit can go after not just the asset they are/were living in but the other assets in the portfolio as well.

Steve Vaughan · Answer

I invest, own and hold passively in an LLC.  I operate and receive my active income (mgt, wholesale, flip) in an s-corp.  Depends on what 'investor' means to you I guess @Michael Johnson?

Jeremy Hunter · Answer

@Michael Johnson  here in hawaii it ain't cheap either unless your getting a condo! Lol! Of course there is using leverage of LOC and seller financing that can help not bite into your own capital as much. But even still even attempting a flip can be difficult because so much cash is needed upfront. I was looking at a tear down that would have had me needing over 900k to 950k all in. But there were not many comps that warranted my selling price at the end. And there were other bids closer to asking price, so I moved on to.

Sometimes if it is a bit risky in the end do not need to push it if it ends up being more risk than you can handle at the moment right!

I know some folks have done the LLC treated like an S-corp but I am still not sure how I quite like that one in the end. But again it needs to match with what your plan is for the company and what your doing that gives you the shield your looking for and the tax benefits. And there is always ways to find tax benefits with what your doing.

LLC, S Corp, or C Corp? Partnerships? What is best?

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