To LLC or not to LLC

[Jarrod Askin]

What are the pros and cons of landlording as an LLC?

[Brian Burke]

This question gets asked on BP a LOT. Everyone who is getting started wants to know if they should form an entity or not. Folks think it's the first step to becoming a successful investor and a necessary exercise to protecting their butts. Others who are new to the business jump on the bandwagon and overwhelmingly agree that you should form an entity and asset protection attorneys (who sell legal services) add more wood to the "form an LLC" fire. The question was asked once on BP--"has anyone been sued and your LLC saved you?" No takers.

If you are investing with someone else, an LLC is necessary versus the two of you going on title as individuals. You don't want your partner's troubles clouding your title. I'll endorse that.

But I don't endorse the concept that everyone needs to own all real estate in an entity.  Entities add additional layers of cost not just to form them, but to maintain them whether it's annual fees to the state or the cost of doing a corporate tax return.  I have close to 20 entities and it costs me around $50K/year (maybe more but I'd rather not know I'd probably get depressed) for the privilege.

I've owned over 700 properties most in entities but many were not.  Not once has one of these entities offered my any level of lawsuit protection.  That is what my insurance is for.  The attorney on Podcast 109 is right, you will get sued.  I've been sued several times.  The problem with lawsuits isn't a judgment, it is the cost of defense. 

My LLCs didn't help in the lawsuits because I won all of them.  Well, actually, I did get one judgment.  We sold a flip and the new owner claimed that our contractor didn't do something right.  He was correct.  We offered to fix it right away, and they wouldn't let us.  Instead they filed a small claims suit for $5K for a repair that would cost $1,500 max.  We offered to pay $1,500 and they refused.  Went to court, and the judge ruled in their favor and issued a judgment for $1,500 which we paid immediately by handing them a check.  Did we win or lose?  I'd say we won.  It was a shakedown for $5K and it didn't work.

On the other hand, I had another suit that cost me $175,000 to defend and I won. But did I win or lose? Would an LLC help me? Not at all, your LLC won't pay the attorney's fees unless you put the money in the LLC and write the check.

Don't take advantage of people, conduct business honestly and fairly, and carry good insurance.  That's the best asset protection there is, in my book.  Save the LLCs for segregating investors or for joint ventures where a business structure is needed.