​Should You Form a New LLC With Every Investment?

Lots of investors choose to set up their investments through LLCs rather than through their own names. Why? Because there are a lot of benefits that come with LLCs, such as tax breaks and asset protection.

But what happens when you want to invest in more than one property? Do you buy the additional properties under the same LLC, or is it better to set up a new LLC for each one?

Before I tell you what I think is the best choice, consider these pros and cons of setting up individual LLCs for each investment.

Pros

1. Investment structure - If you’re partnering with different people on different investments, each LLC will detail each person’s role. For instance, if you, Mike, and Diane are partnering on Deal #1, but you, Diane, and John are partnering on Deal #2, it can get confusing. Having a different LLC for each investment clearly defines each person’s ownership percentage and role, making it easier to manage.
2. Personal asset protection - Different LLCs also afford better protection for you and your assets. If you have 10 properties grouped under one LLC and you’re sued by a tenant in Property #1, your other properties are also put at risk. With separate LLCs, a liability claim on one property won’t affect the others you own.
3. Better organization - Compartmentalizing each property into its own LLC can also result in improved organization within your investment business. Each property and its associated legalities and finances has its own “place.”
4. Avoiding transfer tax - This won’t work in every situation, but an LLC can also help you avoid paying transfer tax. When you’re ready to sell a property, instead of selling the real property, you can sell the LLC instead, thus avoiding the transfer tax. This will only work, however, if you’ve structured your investments into individual LLCs. Be sure and ask your real estate attorney or accountant if this is applicable to you first, though.

Cons

1. Costly - It costs money to register new LLCS and then renew them each year. Each state charges different fees, but you can expect to pay filing fees of anywhere from $50 to $500 to start the LLC, and annual renewal fees of $10 to $800. When you own multiple LLCs, this can get pricey.
2. Potential lending issues - It can be more difficult to obtain a loan through an LLC. Some banks won’t even do it, and the ones who will usually charge a higher interest rate.
3. Can make things overly complicated - If you own 25 properties, putting each one in its own LLC can complicate your portfolio. Generally, opening multiple LLCs is best reserved for investors owning 10 or less properties. Any more than this, and things can get confusing, so it may be better to lump some properties together under one LLC.

So here’s what I think: if you own 10 or less properties and the LLC registration/renewal fees in your state don’t freak you out, go for it. It’s great for keeping your properties organized, and it offers protection for each of your assets. However, if you own more than that, consider grouping some properties together under one LLC. This also holds for properties that are less expensive. If you’re buying $40,000 properties, it might make more sense to group multiple investments under one LLC. But if you’re purchasing $120,000 homes, assigning each its own LLC may be the better choice.

My recommendation for new investors is to open one LLC, purchase your first property through it, and just see how you like it. You may decide that you only want to own a couple of rentals, and purchasing them as an individual and obtaining liability insurance makes more sense, cost- and time-wise. But if you love the benefits that come with an LLC and you’re ready to make a move on a second property, weigh the pros and cons above and decide which scenario works best for your situation. It will often come down to cost-benefit, and you simply have to go with the scenario that fits into your financial plan and lifestyle.