Brand new investor; just bought 2 properties!!S corp or LLC ??

Question

Hi all,

I can’t believe I made my first post in September on BP and now closing on 2 properties out of state!!! Excited about the fun journey of Real estate investing!!

I have a question regarding asset protection and tax benefits. Should I do S corp or LLC to run my real estate investing business? I want to have personal asset protection as well as the maximum tax benefits. Kindly advise. Thanks 🙏!

Best,

Tsering Lhamo.

Sean O'Keefe · Answer

@Tsering Lhamo generally, if you are planning to buy and hold you'll use an LLC. Investors that flip properties usually have an S-Corp. ...

*This post does not create a CPA-client relationship.  The information contained in this post is not to be relied upon.  Readers are advised to seek professional advice.

Jason Marino · Answer

Hi Tsering,

As noted in the posts above, the main difference between these entities is going to be the tax treatment. I agree that the note above that the S Corporation is more commonly used with active businesses than as a passive Holding Company. Both of the entities have limited liability protections, so that should not be a primary consideration in your decision.

Nate Meeker · Answer

@Tsering Lhamo - I agree with @Sean O'Keefe.

LLC has no tax benefits, S-Corps are for active income like flipping or property management. Be careful of companies trying to upsell complex org structures.

Michael Smythe · Answer

@Tsering Lhamo

How does an LLC Logically Protect a Landlord?

A lot of landlords are advised to put their properties in the name of an LLC for asset protection.

While this is basically true, the reality isn’t what most landlords think.

If a legal issue occurs with your property resulting in a lawsuit, there’s a decent chance the plaintiff’s attorney will be successful in “piercing the corporate veil” of your LLC if you were sloppy and being able to sue you directly.

Why? Because most landlords don’t follow all the legal requirements to maintain their LLC as a separate entity.

So, what else can a landlord do to protect their personal assets from a business lawsuit?

Well, what types of lawsuits is a landlord most likely to face?

Lawsuit from tenants for personal injury!

How many tenants have the funds to pay a retainer fee to an attorney to handle the lawsuit?

Not many! Most will find a personal injury attorney that will take their case on contingency – meaning the attorney will charge very little, if anything, upfront, but take a third or more of whatever they collect.

And here is the secret of using an LLC to protect your personal assets – by “hiding” them!

You see, there’s nothing worse for an attorney taking on a contingency case, fronting all the legal expenses and investing their time to win a case and obtain a court judgment – then NOT be able to collect on the judgment.

So, astute attorneys will research the available assets and insurance before accepting a case on contingency. If they can’t find either, why would they waste any resources on the case?

If all they can find is the property in the LLC, it may not be worth the additional hassle of trying to force a sale of the property to collect on their judgment.

So, they’ll research who owns the LLC and what assets that individual has.

If you act as the agent for your LLC and use your personal address – guess what? You’ve just made it super easy for them to find you and now they can research your other assets and probably sue you!

So, if you’re going to go through the effort of setting up an LLC, be sure to take the extra steps to find an attorney, CPA or other professional willing to act as the agent for your LLC and allow you to use their address. Most will charge a reasonable annual fee, but think of it as insurance.

Lastly, consider just getting more insurance, typically an umbrella policy to cover your entire portfolio, instead of OR in addition to an LLC.

Of course, discuss all this with an attorney!

Tsering Lhamo · Answer

Hello Mohammed and thank you for your reply. Do you have an LLC set up or can you refer me a good CPA/ attorney you use? Thanks much and will try to attend one of your meet ups for a chat sometimes ! I live in the neighborhood.

Mohammed Rahman · Answer

This is awesome congrats @Tsering Lhamo! You should speak with your CPA/accountant as to what works best for your unique situation.

Most people will choose an LLC because that's what they think will give them the protection they need.

Alternatively, your current W2 might be making you hit a certain tax threshold wherein it makes sense to setup an S-corp as an officer and then use the tax structure to hit a lower tax bracket.

Brand new investor; just bought 2 properties!!S corp or LLC ??

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