How Many Properties Per LLC?
It is amazing how often I am asked by people starting in real estate investment: “What type of corporate structure is best for owning investment property”. I listen to that question more often than I am asked where to find tenants or how to finance the property. Here is some given information that I have compiled and learned over the years.
Disclaimer: Right in advance, I have to remind everyone that I am no attorney nor do I play one on television. You should seek capable legal advice in your area, regarding this subject. This info are simply just what I have learned through reading, executing, and speaking with lawyers. Although there are many different business entities (LLC, C-Corporation, S-Corporation, collaboration), easy, and simple to create and cheaper to maintain, for real property investments, is an LLC (limited liability company). Additionally, an LLC is very flexible and can have any number of owners (technically called ‘users’). Each member can own any percentage of the business (as long as the full total equals 100%). Lastly, members can be other LLCs, companies, and trusts.
This flexibility gives you to customize the configuration to suit your taxes situation and liability safety goals. C-Corporations pay fees on profits generated by the corporation, first. The owners pay fees on the gains they receive as dividends again. Although, S-Corporations avoid the organization tax, their corporate structure and number/type of owners are severely limited (S-Corporations can only just be owned by individuals, not trusts, or LLCs.
Fortunately, unlike corporations, LLCs do not pay any corporate and business tax. All revenue and losses “pass through” to the member’s tax returns at the percent that they own the business. That is especially helpful if you own multiple LLCs as the profit and loss from each roll-up to your personal taxes (a reduction on one can offset a revenue on another).
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As the name indicates, an LLC provides limited liability to its people, meaning that any liability created by the ongoing company is bound to the business. The members’ personal assets are protected from all claims against the business. Partnerships and unincorporated businesses do NOT provide liability safety. It is critical that you protect your personal resources as a 2005 Congressional research mentioned: “smaller businesses bear 68 percent of business tort liability costs”.
A properly set-up and maintained LLC can protect the owner’s interests in the resources of the LLC from the owner’s personal lenders. I would recommend that you seek advice from with a professional real estate lawyer when you set up your first LLC (or purchase your first investment property). Pay them to determine the LLC on paper and with the continuing state. Have them educate you on what should/must be achieved on an annual basis to maintain both a legal entity of the LLC and the litigation protection of the LLC. 1000 per LLC. Some attorneys might offer a discounted price.
How Many Properties per LLC? This is where a good lawyer can consider the liability protection versus the expenses. Many advisors shall tell you firmly to create one LLC per property. Practically speaking this is simple when you own 2-4 properties, but it will become cost prohibitive when you own 15 properties progressively.
400 per LLC-you can see right now your goverment tax bill if you had 15 LLCs!). Most real estate investors will put 3-5 properties in each LLC (grouping them based on geography, age, responsibility risk, or equity position). A common misunderstanding is that you need to buy the investment property in the LLC’s name. Unfortunately, you would need to use commercial financing (with a 20% deposit) to have your LLC buy the property in the beginning. A “Quit Claim deed” is all that’s needed is to lawfully transfer the property from your personal name to your LLC. The mortgage(s) will remain in your individual name, and it will remain on your credit report, but you shall gain the responsibility safety mentioned previously.