Sole Proprietorship vs LLC while owning out-of-state rentals

[Vincent C.]

I'm a California resident but own a rental property in PA, and looking to get another one in PA or out-of-state. 

Are there any major differences in doing a sole proprietorship vs an LLC; are there major advantages using one over the other?

Also, for an LLC, would I have to file one in California but also in the state of the rental property?

I am also wondering how many required tax filings need to be done a year. If there is too much paperwork, it may not be the best choice to incorporate.

What do you guys recommend?

[Katie L.]

@Vincent C.

There are several considerations that can go into the analysis of whether you need an LLC or whether a large insurance policy will suffice. Your decision 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. If you create an LLC, you will need a business account. California does not recognize series LLCs so each individual LLC would cost you $800 in California if you were to go thy route.

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.

Also, if you do not have an estate plan yet, you will likely want to get your living trust completed and other ancillary documents such as a Will and power of attorney, etc. In California, probate is a huge hassle and decedents are subject to probate at pretty low dollar values that having a family trust once you own property is almost essential for planning and peace of mind.

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.