A common question real estate investors have regarding their company’s business structure is: “Should I create a separate Limited Liability Company (LLC) for each investment property I own, or can one LLC can cover all properties?” Well, there’s no one “right” answer because the best business structure for multiple properties can depend on a variety of factors. Generally, though, forming an LLC for each property proves advantageous for several reasons.
Benefits of the LLC Structure for Real Estate Investors
Let’s back up a bit and remind ourselves why the LLC offers advantages to business owners in the first place.
In an LLC, the owner’s personal assets are shielded from business liabilities just as they would be in a C Corporation. In addition, the IRS views the LLC as a “disregarded entity.” Thus, an LLC does not file separate taxes; company profits and losses flow through to the owners and are subject to each owner’s individual tax rates.
The LLC is great for a business owner who wants liability protection but seeks minimal formality in setting up and maintaining a business entity. The LLC structure also comes with fewer ongoing compliance requirements than a corporation. It can also be a beneficial structure for a business with foreign owners since anyone (C Corporation, S Corporation, another LLC, a trust, or even an estate) can be an owner of an LLC.
Owning real estate comes with inherent liabilities — from broken balcony railings to faulty electrical wiring to icy sidewalks to mold and other potential hazards. The LLC business structure forms a wall that shields individual owners from personal liability. If sued by a tenant or guest, the defendant in the lawsuit is the LLC, not its owners. Therefore, a judgment can be collected from the LLC’s assets but not from the owner’s personal assets (e,g, checking account, retirement savings, home, etc.). Note that there are some exceptions, such as when the owner has committed fraud or was negligent. Under those circumstances and others where a court deems an owner personally responsible, the owner’s personal assets could potentially be at risk.
Advantages of Separate LLCs for Multiple Properties
I think the best way to illustrate the benefits of individual LLCs for each investment property is to use a hypothetical example.
Let’s say a real estate investor purchased a few rental properties and deeded them both to a single LLC (named My Properties, LLC). Then imagine an unfortunate incident happened at one of the properties, and the tenant at that property was awarded a large settlement. In that case, the judgment could be collected from any of the assets owned by My Properties, LLC — including not only where the accident occurred but also the investor’s other rental properties since they are all under the one LLC. So, even though the tenant’s injury occurred at just one location, all others could lose their assets. Obviously, this could be devastating financially for an investor!
What could help avoid that nightmare? Setting up a distinct LLC for each property so that each investment is protected from the liabilities of the other properties.
For example, if Property A is sued, only the assets belonging to LLC A are affected. The investor’s personal assets and those of Property B and C, etc., are shielded because those locations are set up as their own limited liability companies.
When forming multiple LLCs, many investors and builders name each LLC after the address of the property it’s created to protect (e.g., 123 Main Street, LLC; 456 State Street, LLC; you get the idea!)
Another Possible Option: The Series LLC
Some states recognize a variation of the LLC structure, called a Series LLC (SLLC). The Series LLC offers layered liability protection, and real estate investors may find this structure a good choice depending on their situation. An SLLC consists of a parent (umbrella) LLC with other LLCs (“series”) set up beneath it. Each series under the main LLC has its own income, debts, obligations, and rights. The parent LLC’s assets, the real estate investor’s personal assets, and each individual series’ assets are protected from the debts and liabilities of any individual series within the SLLC.
Depending on the state’s laws, a Series LLC might cost less to set up and maintain than creating stand-alone LLCs. Some states require an Articles of Organization form and fee to establish the umbrella LLC with no filing fees required for setting up the individual series LLCs beneath that parent company. Likewise, only one annual report filing (if required) is due for the parent company and all series beneath it.
Make an Informed Decision
While setting up and maintaining multiple LLCs may seem like a hassle, taking that little extra time up front can help real estate investors make the most of their investments. Because assets and liabilities are kept separate, choosing to structure properties as separate LLCs may also help avoid legal pitfalls.
Of course, the ideal structure for an investor will depend on the specific circumstances. That’s why it’s crucial for investors to talk with their attorneys and tax advisors to understand the legal and tax implications of their business structure options.
If you decide to proceed in forming an LLC for any of your real estate investments, CorpNet’s professional staff is here to assist you every step of the way. Contact us about handling your business registration paperwork and ongoing compliance filings so you can protect your properties, safeguard your personal assets, and have peace of mind.