LLC vs Sole Proprietorship

[John Rooney]

Hi everyone!

I have been debating creating an LLC or conducting business as a sole prop with DBA (doing business as). Currently, I do not have any properties. However, I plan to purchase my first rental property in the near future. I figure this is a good time to consider business structure before any properties are purchased.

I understand the personal protection and the ability to choose the tax structure an LLC provides, but does an LLC have additional benefits that a sole prop does not? Also, I'm aware that there is a greater cost to start an LLC as well as a yearly fee to keep it current. Would it make sense to create LLC even if I have only one, or even zero properties?

A little background on my situation. I live in IL, but am look to long-distance BRRRR rental properties in KY. I am considering creating the LLC in KY as I do not plan on living in IL for the long-term. Would this change my strategy?

Any information, tips, and recommendations would be greatly appreciated!

Thanks in advance!

[Bob Daniels]

Opinions will vary

My thought process is that unless you have several properties, or a relatively high net worth, an LLC is severe overkill. As you mentioned an LLC will have startup costs, and potentially ongoing costs as many states require ongoing annual fees. It also means that you need to separate your accounting so as to ensure you keep your companies funds separate from your personal funds.

Lets assume a worst case scenario that your tenants sue for whatever reason. If the home is in an LLC, they could force the sale of the home in order to satisfy the judgement if they win the case. If the home is in your personal name they can still come after the house, as well as anything else that you own. But if you don't own much besides the house, then they aren't going to get much besides the house, in which case the LLC didn't really protect you from much of anything.

A general umbrella insurance policy in my opinion will likely serve you FAR better than an LLC would. You can generally find a $1million insurance policy for maybe $150-200/year, which could easily be what it would cost to create an LLC. In this situation if you got sued, your insurance policy would pay out and you would keep the house.

If you do go the LLC route, I would highly suggest forming the company in the same state that it generates money from. Because if you create the LLC in Illinois, but it operates in Kentucky, then you must also file paperwork so that your IL LLC is allowed to operate within KY, which means additional paperwork filing and annual fees.