Do You Really Need a LLC When You Own Real Estate?

This is one of those questions that I get asked all the time. You can ask 100 attorneys or CPA’s and get 100 different responses – all have merit. There are pros and cons to owning real estate in a LLC or in your personal name. The argument usually boils down to two main schools of thought:

a) Own your property in a LLC for asset protection and tax benefits; or

b) Own your property in your personal name to save money because LLC’s are expensive – both in creating them, and in having tax returns prepared every year by your CPA. As for asset protection, you can load up on insurance for protection.

If you are deciding between a and b above (or something similar thereto) – I strongly recommend you pick option A – here’s why:

First – LLC’s aren’t that expensive. In PA, the Dept of State charges you $125.00 to file your LLC, then you have to advertise it in two publications which runs you around $100.00. You will have to have an Operating Agreement for your LLC. Whether you retain an attorney to do so or not, you should be able to form a LLC for under $1,000.00 (including filing fees, advertising and legal fees).

Second – a separate tax return each year should not be that expensive. Each LLC will be very simple – rent in, expenses out. Your CPA should prepare those rather economically. If they are charging you exorbitant rates, time to find a new CPA as these are not difficult.

Third – asset protection. As most know, the LLC offers you a corporate shield which protects all of your personal assets (of course this does not protect you if you commit fraud). Asset protection has substantial value – piece of mind. If you were to get sued, whatever you own in that LLC is at risk, while your personal assets remain protected. The economic interests you receive from other business ventures (i.e. money you receive as distributions of profit) are available to be attached via a Charging Order. However, the business asset itself is not at risk from creditors.

Fourth – when owning a property personally, insurance will cover you. I agree, most of the time, a robust insurance policy will cover many issues you may have – such as the classic slip and fall incident. However, its not 100% effective. Here is a scenario a colleague of mine was confronted with where insurance didn’t cut it. His client owned a rental property in his own personal name and had a sizable insurance policy to protect himself. He decided to have electrical work done on the property by his handyman, who was not a licensed electrician. Shortly thereafter, the house caught on fire and two college student tenants died. I don’t care how much insurance you have, I guarantee you don’t have enough to cover such an event. That property owner’s life is over – he will never own anything again. Filing Bankruptcy won’t help because it was determined to be a willful tort. Game over. I admit – this is a rather rare fact pattern because unfortunately people died. But if you think about it, just how outlandish is it from what many owners do in maintaining their properties? Admittedly, if he owned it in a LLC it would not have alleviated everything (i.e. charging orders, etc.), however, his personal assets would have remained protected.

To me, what this boils down to is the old adage of an ounce of prevention is worth a pound of cure. If the added costs of the LLC creation and the tax returns chew into profits too much, my response would be that you probably shouldn’t own that piece of property.