Joe: Hey, it’s Joe Crump again. Welcome back
to the program. This next question is from Joe Linus from Mill Valley, California. He
says, “What’s the advantage of an LLC (limited liability corporation) over a corporation”
(I assume he means C corporation or S corporation) “when holding investment properties? I know
one guy who forms an LLC for each property and then all the LLC’s are owned by a C Corp
for taxes. What’s the best solution for the average investment property owner?”
Joe: Well, the first thing is to start doing deals. Make some money first, because you
don’t need a corporation until you’re making some money.
Joe: I remember back when I was first getting started my accountant said, ‘At least make
$75,000 in your business before you start worrying about a corporation. Before that,
you can just do it on a Schedule C on your personal tax returns.’ You can still take
all of the deductions that you can take normally. It doesn’t give you much asset protection,
so if you’re starting to hold property, that does become an issue. Now, the corporation
itself doesn’t give you a huge amount of asset protection, but it does give you some and
it does give you some tax advantage, so once you start buying properties and once you start
keeping those properties, then it makes sense to start putting them into a corporation.
Joe: Now, I’ve got a lot of properties, and if I had a corporation for every single one
that I set up, I would go crazy. So what you’ve got to do is look at how many properties do
you have that have a lot of equity? You’re more worried about losing your equity than
you are worried about losing the property. If a property doesn’t have much equity, then
you’re not really that worried about losing it. If you’re only losing 10 grand or 20 grand,
or if there’s only 10 to 20% of equity in that property, there’s not enough equity for
people to come in and foreclose because of a judgment.
Joe: They may look and say, ‘Oh, he’s got 5 properties or he’s got 10 properties in
that corporation. Let’s foreclose on it.’ That’s not what they’re going to say. They’re
going to say, ‘He’s got 10 properties in that corporation and each one of them have $100,000
worth of equity. Now he’s got a million dollars we can go get.’ That’s something they might
go after. But if they look at it, and see he’s got 10 properties and each of them have
$10,000 to $20,000 worth of equity, and if we’d sold them it would cost us _x_ amount
of dollars, and after we got them all sold and liquidated, we’d have nothing left, so
we’re not going to foreclose or try to sue him because there’s not enough money there.
Joe: So the big question is what is your comfort level on how much you can lose — if you’re
willing to lose $10,000, or if you’re willing to lose $100,000? Really, it comes back to
how much money you’ve got. If you’ve got a lot of money, you’re going to have more equity
in these LLC’s. If you’ve got fewer properties, you’re going to want to get a few more. But
I wouldn’t split up any more than 5. I’ve got a lot more than 5 properties in LLC’s
and I think that’s probably still a safe way to do it.
Joe: There is going to be some liability. You might want to consider liability insurance;
an umbrella policy of some sort. It’s not that expensive. You’re going to have landlord
insurance which is going to cover you on a certain level as well. There’s a lot of ways
that you’re covered, and there’s a lot of things that can go wrong, but I think that
it’s much worse if you don’t do anything or you don’t do any business at all.
Joe: My philosophy? — Just start making some money. Worry about the other process later.
Go get an accountant later to look at your specific situation and make sure that you’re
doing it in a way that makes sense for you, because the job you have and all of those
things, e.g. the income that you have, the other businesses that you have, are all going
to make a difference on how you do your taxes. I hope that helps.