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Updated 7 months ago, 05/20/2024

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81
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56
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Chase Cline
  • Investor
  • Corpus Christi, TX-Texas
56
Votes |
81
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Should You Form a LLC for Each Individual Rental Property?

Chase Cline
  • Investor
  • Corpus Christi, TX-Texas
Posted

My wife and I just bought our second property and were considering forming an LLC for them. I just read something that said some investors opt to form an LLC for each individual property as a shield so that any lawsuit could only be filed against THAT particular property and not risk having all other owned properties included in the suit. Seems a little overkill to me, but it does make sense.

Thoughts on this?

We've owned our first rental for almost 4 years now so it's definitely time to form something!

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316
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130
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Calvin Lipscomb
  • Brooklyn, NY
130
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316
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Calvin Lipscomb
  • Brooklyn, NY
Replied
Originally posted by @Derek Janssen:

I have an LLC for each of my properties. I agree with @Lance Lvovsky and @George Pauley. Risk vs. Reward.

It's an insurance policy.  

I walked into my lawyer's office expecting to get 1-2 LLCs.

He did a search on my name and within 30 seconds knew about all the properties I owned in that area.  He said, if someone were to get injured on one of my properties (hypothetically) and walked into his office wanting to sue me, he would most likely take that case based on the amount of houses I had and the assets to go after.  It convinced me that I wanted to do what I could to mitigate that risk.

To each their own - there's no right answer.  I'm just sharing my story with you. 

 The lawyer gave a honest analysis from that prospective.  Thanks for sharing.

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Todd Worrich
  • Attorney
  • San Antonio, TX
4
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4
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Todd Worrich
  • Attorney
  • San Antonio, TX
Replied

I am a lawyer and real estate investor. While this is not legal advice :) I can tell you how I do it. I have four properties in one LLC and then I have an umbrella policy over those properties for liability purposes. An umbrella policy is relatively cheap and I feel secure in doing it this way. If you have a different LLC for each property you would have better liability protection ,however, you have all the extra maintenance that goes along with having multiple LLCs. It really would be based on your risk tolerance how you want to do it. Good luck!

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Account Closed
  • Specialist
  • Paradise Valley, AZ
2,932
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Account Closed
  • Specialist
  • Paradise Valley, AZ
Replied
Originally posted by @Chase Cline:

@George Pauley lol yes the pucker factor is always a great metric! I think I will take this method for now and once I get a team maybe I will have them do all the bank accounts, forming, etc.

@Derek Janssen didn't think about it that way, great point. Definitely something to think about.

@Michael Plaks I have never heard of a Series LLC before, I will definitely have to do some research on that. Thanks for the response!

@Tom R. I see your point, but it would suck to really start making some headway and then one "accident" cause you to lose everything simply because you didn't take the time and spend $200 to incorporate

I was advised that simply forming an LLC isn't enough. You have to treat it as an LLC. Most entrepreneurs don't have time for all "that fussy stuff" like having meetings and keeping minutes. Lo' and behold, that is what they ask for at trial. They want proof you treated the LLC as a business entity. they want proof you formed the LLC correctly. They want proof you intended the LLC for business purposes not just to hide assets.

A well written article comes from someone who defends LLCs. 

The Five Most Common Ways to Pierce the Corporate Veil and Impose Personal Liability for Corporate Debts

Jimerson & Cobb P.A.

1. The existence of fraud, wrongdoing, or injustice to third parties.

2. Failure to maintain the separate identities of the companies.

3. Failure to maintain separate identities of the company and its owners or shareholders.

4. Failure to adequately capitalize the company.

5. Failure to follow corporate formalities

So, don't buy condoms with holes in them and don't form LLCs unless you mean to follow ALL the rules. Either one will surprise you if things go "wrong".

User Stats

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George Pauley
  • Chandler, AZ
269
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168
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George Pauley
  • Chandler, AZ
Replied
Originally posted by @Account Closed:

The Five Most Common Ways to Pierce the Corporate Veil and Impose Personal Liability for Corporate Debts

Jimerson & Cobb P.A.

1. The existence of fraud, wrongdoing, or injustice to third parties.

2. Failure to maintain the separate identities of the companies.

3. Failure to maintain separate identities of the company and its owners or shareholders.

4. Failure to adequately capitalize the company.

5. Failure to follow corporate formalities

So, don't buy condoms with holes in them and don't form LLCs unless you mean to follow ALL the rules. Either one will surprise you if things go "wrong".

Have a separate business bank account for the LLC. All business related transactions occur through that account. No non-business transactions go through that account.

Have a separate email for the business.  All business emails go through that email, etc.

Make sure the LLC, not you, are on the leases.

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Scott L.
  • Investor
  • Flower Mound, TX
198
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182
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Scott L.
  • Investor
  • Flower Mound, TX
Replied
Originally posted by @Sean McElligott:

Just so you know....a series LLC costs about 10,000 to create and it is a product that is not tested or even recognized/understood in most states. Make sure you consult with a legit and knowledgeable attorney...

That's interesting because last year I converted my Texas LLC to a series LLC and purchased a property inside one series that I created for that purpose. I use the main LLC to manage my other 2 SFR's. It cost $130 for the filing fees with the state to amend my certificate of creation with the secretary of state. My lawyer even told me to do it myself. He reviewed all the real estate transaction documents and paperwork from the title company and said they were fine. The Texas Business Code is very specific about the liability protection in a Texas Series LLC. It is exactly the same as for a regular Texas LLCs which have been around for over 25 years. I have no doubt that they would hold up in court as well as any limited liability entity. If you're doing business in Texas with properties owned in Texas your corporate veil on a Texas Series LLC is going to be as strong as a corporation if not stronger.

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Ronald Rohde
Pro Member
#3 Commercial Real Estate Investing Contributor
  • Attorney
  • Dallas, TX
2,131
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5,137
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Ronald Rohde
Pro Member
#3 Commercial Real Estate Investing Contributor
  • Attorney
  • Dallas, TX
Replied
Originally posted by @Scott L.:
Originally posted by @Sean McElligott:

Just so you know....a series LLC costs about 10,000 to create and it is a product that is not tested or even recognized/understood in most states. Make sure you consult with a legit and knowledgeable attorney...

That's interesting because last year I converted my Texas LLC to a series LLC and purchased a property inside one series that I created for that purpose. I use the main LLC to manage my other 2 SFR's. It cost $130 for the filing fees with the state to amend my certificate of creation with the secretary of state. My lawyer even told me to do it myself. He reviewed all the real estate transaction documents and paperwork from the title company and said they were fine. The Texas Business Code is very specific about the liability protection in a Texas Series LLC. It is exactly the same as for a regular Texas LLCs which have been around for over 25 years. I have no doubt that they would hold up in court as well as any limited liability entity. If you're doing business in Texas with properties owned in Texas your corporate veil on a Texas Series LLC is going to be as strong as a corporation if not stronger.

What case law indicates that series LLC protection is stronger?

  • Ronald Rohde
  • User Stats

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    Scott L.
    • Investor
    • Flower Mound, TX
    198
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    182
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    Scott L.
    • Investor
    • Flower Mound, TX
    Replied
    Originally posted by @Ronald Rohde:
    Originally posted by @Scott L.:
    Originally posted by @Sean McElligott:

    Just so you know....a series LLC costs about 10,000 to create and it is a product that is not tested or even recognized/understood in most states. Make sure you consult with a legit and knowledgeable attorney...

    That's interesting because last year I converted my Texas LLC to a series LLC and purchased a property inside one series that I created for that purpose. I use the main LLC to manage my other 2 SFR's. It cost $130 for the filing fees with the state to amend my certificate of creation with the secretary of state. My lawyer even told me to do it myself. He reviewed all the real estate transaction documents and paperwork from the title company and said they were fine. The Texas Business Code is very specific about the liability protection in a Texas Series LLC. It is exactly the same as for a regular Texas LLCs which have been around for over 25 years. I have no doubt that they would hold up in court as well as any limited liability entity. If you're doing business in Texas with properties owned in Texas your corporate veil on a Texas Series LLC is going to be as strong as a corporation if not stronger.

    What case law indicates that series LLC protection is stronger?

    It's not case law, it's statute And I was engaging in minor hyperbole by saying it "could" be stronger. I am not aware of any case law which makes it weaker for sure. The Texas Business Organizations Code is quite explicit on the protection available to LLC's and incorporates it into the code authorizing series. The only Series LLC case I've seen is federal and doesn't specifically deal with Texas entities. There's no reason to say that a Series LLC veil would be any easier to pierce than that of a Texas corporation. The BOC even includes protection for minor record keeping mistakes that trial lawyers try to use to pierce corporation protection. Texas has come a long way since the Pennzoil Texaco days of the 1980's. I have it from local real estate attorney in my area that Texas Series LLC are particularly well suited to SFR investing, especially for "small fry".

    User Stats

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    Brian Bradley
    Pro Member
    • Attorney
    • Wilsonville, OR
    411
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    Brian Bradley
    Pro Member
    • Attorney
    • Wilsonville, OR
    Replied

    No. Talk to an asset protection attorney for this. Only an asset protection attorney after discussing all your assets and total net worth can advise you on what is the best structure. An LLC will NOT blindly protect you from liability. The veil is very easy to be pierced if not set up correctly with property AP terms, and it will need to work in conjunction with a Asset Management company partnership controlling the LLC and a trust to really protect you. It is a misconception to think that just setting up an LLC will protect you from liability.

    User Stats

    182
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    Scott L.
    • Investor
    • Flower Mound, TX
    198
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    182
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    Scott L.
    • Investor
    • Flower Mound, TX
    Replied

    I was thinking about St. Kitts & Nevis LLC, held in a Cook Islands foundation, owning a Nevada LLC, all owned by a Panamanian Trust. Now for the Panamanian trust I would establish it using my Republic of Dominica 2nd passport (visa free travel to 70 countries).

     But then I found out that a Nueces County (Texas) judge could order my property forfeit to satisfy a small claims JP court judgment, so I went to Allstate and raised my homeowners liability limits.   :-) 

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    Mike S.
    • Investor
    • Broward County, FL
    929
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    Mike S.
    • Investor
    • Broward County, FL
    Replied
    Originally posted by @Scott L.:

    I was thinking about St. Kitts & Nevis LLC, held in a Cook Islands foundation, owning a Nevada LLC, all owned by a Panamanian Trust. Now for the Panamanian trust I would establish it using my Republic of Dominica 2nd passport (visa free travel to 70 countries).

     But then I found out that a Nueces County (Texas) judge could order my property forfeit to satisfy a small claims JP court judgment, so I went to Allstate and raised my homeowners liability limits.   :-) 

    Offshore asset protection is great for assets that are not in the US (foreign properties or bank/brokerage accounts). If your property is physically in the US, it is really easy for a US jurisdiction to directly assert control over it without bothering with your offshore entities...

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    NA Bonelli
    Pro Member
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    NA Bonelli
    Pro Member
    Replied

    I am a Calif General Contractor. I am approaching retirement in 3 years and want to buy rental properties to offset my W2 income. Is this possible with individual LLC's?

  • NA Bonelli
  • User Stats

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    Tom S.
    • Real Estate Investor
    • Burlington, VT
    1,402
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    Tom S.
    • Real Estate Investor
    • Burlington, VT
    Replied

    @NA Bonelli Speak to a CPA, but LLC's are not needed to offset your W2 income. The LLC's will be disregarded for tax purposes, and the income and expenses of the rental properties will go in Sch E of your personal tax returns.

    Yes, it will offset W2 some, depending on how the property is financed and the cash flow.  For me, my properties at purchase time generated some cash flow, but with the depreciation, it generated small loses on my tax returns.  Depending on how much you make for your W2 income, those losses are deductible, phased out, and not allowed at all.

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