LLC, LP, or S Corp? Which structure do you prefer?

Question

Just getting started with REI. My go to resource for advice on this matter is a successful CA real estate investor, who happens to be a family member, and he believes that for California, the best structure is an S Corp.

Any thoughts on this?

Of course, I'm not asking legal advice and I will contact an attorney and CPA.

However, if anyone is willing share there experiences on this topic, it would be greatly appreciated.

Thanks,

Matt

Katie L. · Answer

@Matt Pich-Maxon

There's a lot that goes into that analysis.  Depends on what you're doing with the real estate (buy-and-hold, flipping, wholesaling, etc.), how much work you are doing personally (do you rise to the level of being an employee, do you want merely passive income), do you wish to have the real estate provide earned income for you (for instance, if you wanted the ability to contribute to a retirement plan with pre-tax money), etc.  There will be slight differences in self-employment taxes in each instance.  S-corps have some limitations on who can be shareholders.  LPs have to have a GP, who will have unlimited liability.  Each will have different filing obligations with the State, though each will be subject to the California $800 minimum tax.  LPs have to have at least two partners, whereas LLCs and S-corps can have only one single member/shareholder.  Corps are generally not advised for holding title to real estate, and you have possible built in gains taxes with an S-corp.  So... if you ask 20 people, you'll probably get 18 different answers because the best option varies for each person depending on their circumstances.  It also may depend on their other assets, their estate planning, who they are investing with, etc.  I work in San Diego and have seen several different ways to do it and a different entity type for different situations, though most people seem to favor the LLC.

*This post does not create an attorney-client relationship nor a CPA-client relationship.  Readers are advised to seek professional advice.

Dan H. · Answer

@Matt Pich-Maxon

I do not have the expertise to provide a good answer to the OP but I second what Jo-Ann indicates.  I am a big fan of the peace of mind that comes from insurance and in particular an umbrella coverage (I am not an insurance sales person).  We carry a substantial umbrella coverage.  I know that if anything happens, I will have the insurance company taking on the fight at they have a significant vested interest.

The peace of mind is worth the cost but the confidence that it provides also has value.  For example, I have successfully resisted bogus Emotional Support Animals multiple times.  Having the umbrella coverage provides additional confidence in these types of scenarios.

I suspect that it is close to annually that someone has threatened to sue us.   I have yet to be sued.  it is in part because the tenants typically do not have any case and are hoping that the threat of law suit will result in them getting their way.  But it may also be in part because I give the appearance of go-for-it.  Enough threats toughens the skin.  Having confidence that the insurance company will pay out first means I do not have to be concerned about frivolous law suit threats.  Threatening to sue me for something frivolous will get the tenant on my undesired list and has yet to result in an actual suit.  My undesired tenants get rent rates above market rate.  They usually get the hint and move elsewhere and do not get a glowing landlord recommendation (off the record - Indicate they threatened to sue for something frivolous and see how many landlords desire them as tenants).

I love the very low vacancy rate of my market.  Poor tenants have difficulty finding places to rent.   Poor tenants are easy to replace; it is rare if my units are not rented in a 1 hour open house.

Jo-Ann Lapin · Answer

I want to see who responds to this as each investor has unique needs. One prince of big advice is work with a good insurance agent and insure your properties as much as you can.

Katie L. · Answer

Account Closed

I think the LLC is a solid choice and the best choice for most of the people who I have seen use it.  Not always the right way to go, but a popular choice for real estate holdings.

Account Closed · Answer

@Matt Pich-Maxon     It is completely different depending on the person and their needs and goals.  Are you thinking more about asset protection or the tax implications?

Also you did not even mention trusts (in case you need more confusion).

@Katie Lepore   Do you think most clients favor the LLC solely because they have heard more about it or do they really consider all the options and just pick the LLC?

Matt Pich-Maxon · Answer

https://www.youtube.com/watch?v=ngw-pm7OhSI&featur...

https://www.youtube.com/watch?v=ArUgnvnEyrY&featur...

I found this info to be useful as well .... Thanks for sharing @Matt Faircloth

Matt Pich-Maxon · Answer

@Dan Heuschele @Storm Silva @Katie Lepore

Thanks for your reasoned responses -- you've all given me things to consider.

I appreciate you taking the time to answer.

As a side note, I did purchase the book from BP "Tax Strategies for the Savvy Investor" as I've found great info in all of the books I've purchased here.

LLC, LP, or S Corp? Which structure do you prefer?

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