Is an LLC necessary?

Question

I’m a newbie at real estate investing and looking to get my first home for rental income. I’m told I should start an LLC to protect my personal assets. Do you guys feel that is necessary? If so, does it have to be my home state or can I choose another?  If I can choose another, what states do you recommend￼?

Christopher Smith · Answer

IMO LLCs are vastly over-promoted.

They appeal to people's personal vanity stroking, mindless herd mentality and irrational fear response. In my jurisdiction they are expensive to "properly" set up (various fees), and expensive to operate (minimum franchise tax charge of $800 Per Year / Per LLC - including each series LLCs and/or foreign formed LLCs). Not to mention all of the administrative burdens and formalities that you must abide to avoid the risk of having your LLC's protective status negated.

Select good properties, put in place responsible management, carry adequate liability insurance (all of which you should be doing anyways), and then if need be because of your personal risk and asset profile add some very affordable umbrella coverage and you should be OK.

Of course you won't be able to then strut around with your vanity plate "LLC" to impress any clueless acquaintances - which admittedly is a very very high price to pay.

Sean Autry · Answer

@Brent T Galbreath- you should get the advice of an attorney.  I don’t know how much you have in personal assets outside of your investment real estate.  A lot of times you can accomplish a lot without the LLC, and just get an umbrella insurance policy to give you enough  protection in the event of legal action.  After you’ve accumulated a number of properties (there’s no magic number, really just depends on the assets you’re trying to protect outside of your real estate), at that point an LLC May make the most sense.

Sorry- I know that wasn’t a direct answer, but hopefully helpful.

Javier D. · Answer

@Brent T Galbreath

Harder to get financing on a corporate owned.

Delaware is best for llcs from advice ive been given.

As it was mentioned before... liability insurance is 100% more important than structuring ownership with residential properties unless partners are involved.

Josh Gruber · Answer

@Brent T Galbreath

First thing that needs to be asked is what kind of real estate investment are you making and how are financing it? If you’re conventional financing like you would for your own personal home you’re not going to be able to buy any investment in an LLC. If you’re using a commercial mortgage, regardless of asset type you can use an LLC. With that being said I 1000% recommend forming one and holding whatever you’re buying in it. Every time you buy another property form a new one and hold the new property in that one...so on so forth. An LLC doesn’t just protect what’s held in it, but more importantly it protects whatever else you own, especially anything in your own name. The LLC you form to own the property in should be done in the state where the property is. I’m not an attorney but 9/10, if not 10/10 attorneys will tell you to hold it in one. Over insuring yourself as some people recommend isn’t enough.

Jared Friedman · Answer

@Brent T Galbreath

Just get an umbrella policy for a few million in coverage.  It costs a few hundred a year.  Everyone should have umbrella coverage. It’s simple and easy to get.  LLCs are far overrated in my opinion.  If your gonna get sued insurance is your first line of defense. I’ve never heard of anyone saying an LLC protected them from a lawsuit if they had decent insurance.  A lawyer is going to go after the low hanging fruit which is always insurance.  An LLC only makes sense if you are buying properties with a group of people or some other special scenario. You get the same tax benefits with or without an LLC. You get a bunch of complications with an LLC when it comes to financing.  If you want a bunch of headaches and additional costs then go for the LLC as well.

Sandra Holt · Answer

In my opinion, there’s no need for an LLC if you have a good umbrella policy. An LLC is just to protect you personally from liability. An umbrella policy does the same thing and is much easier to set up and, at least in my state, cheaper also.

Michael Plaks · Answer

@Brent T Galbreath

This question has been debated on this board for years. Just browse the last 3 months, and you will see several long threads.

Here's a one-paragraph summary. LLCs are not helping with taxes (usually) and not required for business operations in general. Their primary purpose is legal protection aka asset protection - which is attorneys' domain. Attorneys violently disagree, even with each other, about the usefulness and application of LLCs in real estate.

Anybody with a blanket statement - either "no need for LLCs" or "must always have an LLC" - is probably wrong.

Sergio Altomare · Answer

@Brent T Galbreath a few other things to consider is the nature of your investing. If you are just getting started and doing buy and holds using financing, then it's much more beneficial to take title personally, as you'll get much better rates. If you have a lot of assets to protect then an LLC may be beneficial. Also, if you do grow a portfolio large enough and want to trade up by selling individual properties and acquiring another through a 1031 exchange, then they will need to be all titled under the same name or entity.

Lastly, you can always transfer assets into an LLC down the road, depending on your state laws relative to transfer tax, etc.

I would find yourself a local real estate attorney and consider their advice.

Brent T Galbreath · Answer

Thank you all, this is great info!

Jason D. · Answer

@Brent T Galbreath The answer is

Is it necessary? No

Should you use one? Speak with an attorney about your specific situation, and they will advise you.

Is an LLC necessary?

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