Q: If I have five rental properties, should I form five LLCs?
Being a landlord is a tough job. Owning rental properties can be lucrative, to be sure, but it’s also rife with risk. Landlord/tenant laws vary by state, but in general, landlords can be held personally responsible for injuries or accidents that happen on your property. And the more rental properties you own, the more you have to lose in damages. Because of this, landlords sometimes form separate LLCs for each rental property they own.
Depending on filing fees and taxes in your state, this can add up fast (we’re looking at you, California Franchise Tax). But setting up an LLC for each rental property can help protect the assets you’ve worked so hard to build up. In the end, it’s a cost-benefit analysis. Because we’re not business attorneys and we don’t know the particulars of your situation, we won’t tell you what you should or shouldn’t do. But we can lay out the pros and cons of setting up multiple LLCs for your rental properties.
Pros & Cons of Multiple LLCs for Rental Properties
Pro: Liability Protection
Plenty of folks in the rental business know that setting up an LLC for a rental property can help protect your personal assets. That’s because an LLC is a separate legal entity from you, the owner. An entity is just something with its own separate existence. As a separate entity, your LLC has its own liability and assets. This means that if your tenant sues your LLC, your personal assets are typically not fair game.
Pro: Shielding Properties from One Another
Let’s say that like our client, you have five properties, but they’re all owned by the same LLC. In property #1, a faulty handrail on a staircase causes your tenant to fall and suffer an injury. The tenant sues and a court finds that your LLC is liable for damages. Because your LLC owns five properties, all five of those properties are grouped together. Each of them is fair game, and you may be forced to sell the properties to cover damages.
Now let’s say that you’ve put each of the five properties in its own LLC and the same scenario unfolds. The injured tenant sues, but they can only go after the assets owned by LLC #1. So you may lose Property #1, but Properties #2-5 are safe, since they’re separated out in their own LLCs.Con: Filing Fees
Placing your rental properties in separate LLCs is great for asset protection, but it ain’t cheap. You’ve got to pay filing fees and—in most states—annual report fees to keep your LLC going. You’ll also have to appoint and maintain a registered agent in your state.
Some states aren’t so bad. It’s only $50 to start an LLC in Arizona and there’s no annual report fee. But in California, you’ll have to pay a minimum of $800 per year just to cover the franchise tax. If you have five properties, you have to pay the franchise tax for each. That’s $4,000 per year.
For your liability protection to work, you need to stay organized. You’ll need to keep your LLC’s assets separate from one another. Mixing business spending erodes the separation between you and your LLC, which, in turn, weakens your liability protection.
This means you’ll need separate bank accounts and EINs for each LLC you open. That’s not necessarily a bad thing; having a separate bank account for each LLC will help you keep your finances organized and separate. It’s just more paperwork.
An Alternative to Multiple LLCs: The Series LLC
In about two dozen states now, you can form something called a Series LLC. This is an LLC with several divisions—called series—within it. Each series has its own liability and assets. Some landlords will put each property in its own series. That way, if one series faces a lawsuit, the assets owned by other series are typically shielded from the lawsuit.