When to LLC (Now? Later?)

Question

Hi, I'd like to get some feedback regarding at what point I should form an LLC. So currently I own one rental property, and am in contract on another. Both of these properties are out-of-state. I've seen both forum posts and web sites discuss LLCs in the following shapes/forms. Some say to form an LLC for every rental property. Some say otherwise. My previous accountant said that I should avoid forming an LLC until I surpass $1,000,000 in annual gross rental income. He also said that the cost of forming and maintaining an LLC will eat into (and may even eat up) your profits, depending on the numbers. Instead of forming an LLC, he suggested simply to have enough insurance to cover yourself.

I'm going to discuss this with both my new accountant. However, if there are those here that have strong preferences, I'd love to hear your reasons as to why.

Thanks BP!

I'm going to discuss this with both my new accountant.  However, if there are those here that have strong preferences, I'd love to hear your reasons as to why.

Thanks BP!

Account Closed · Answer

@Ryan Cruz I used to provide my personal opinion on this matter and share how many of my clients have or have not utilized LLCs. However, as time has gone on I have learned that the only correct answer is @Logan Allec's response that the only valid answer will come from your attorney.  We can give anecdotal stories and talk in hypotheticals all day but without knowing your specific situation it is impossible to know what is best for you.

Uyenchi Ho · Answer

I agree with your accountant and with Greg S. 100%.  I work for a litigation law firm, and based on my experience, when an LLC gets sued, the individual is also named a defendant 100% of the time.  The plaintiff never just sues the LLC.

Yes, the LLC does give you certain protection, but the best protection is to have enough insurance coverage.  When the clients have insurance coverage, we send our legal bills directly to the insurance company, and when it's time to settle a lawsuit, we almost always based the number on the amount of coverage.

My husband and I have also discussed forming an LLC for our rentals, but we've decided to wait until we accrue more units and bring in more rental income... as advised by your accountant.

Thomas S. · Answer

Your previous accountant was 100% correct. If you have a LLC and get sued the first person you call is your insurance agent. If you do not have a LLC and get sued the first person you call is your insurance agent.

LLCs are physiological protection for the most part. Insurance is your best friend and protector.

Bit if this thread actually gets responses wait and see how many investors actually chime in with first hand experience of being sued and saved by having a LLC. Probably none.

Logan Allec · Answer

@Rick S., @Ryan Cruz is in California, and our lovely state imposes an $800 flat tax on all LLCs registered with our Secretary of State + an LLC fee on all California-sourced gross receipts that ranges from $0 - $11,790.

Logan Allec · Answer

@Ryan Cruz, as a CPA specializing in real estate, I'm telling you, don't listen to your accountant when it comes to legal matters!  When you (or your LLC) gets sued, you're not going to be calling your accountant...you will be calling an attorney!  And frankly that is the only professional who is qualified to analyze your individual situation with an eye to appropriate asset protection and advise accordingly.  There is no one-size-fits-all answer as this analysis depends on many factors, including how big a target you are for a lawsuit.

Rick S. · Answer

Thanks @Logan Allec!

Logan Allec · Answer

@Rick S., California's taxing authority, the Franchise Tax Board, has explicitly stated that it expects non-California LLCs to register in California and pay up if the owner does so much as pick up the phone to call their property manager while living in California.  I posted about this here.

Rick S. · Answer

@Logan Allec ouch, didn't know that.  I would say create the LLC in a different state but that may be too much trouble.  Thanks for the info!

Rick S. · Answer

@Ryan Cruz if you can purchase the second property in the name of the LLC that would save you the trouble of going back later to switch the title from your name.  Also, in regards to the LLC if you are simply treating the LLC as a pass-through on your taxes it really doesn't cost much to maintain an LLC for rentals to be honest.

Ray Harrell · Answer

I have one rental property and I formed an LLC. Cost me $800 to do it. I have one credit card in the name of my LLC and hopefully will purchase my next property in the name of the LLC. Why wait?

When to LLC (Now? Later?)

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