Entity Structure

Somebody at a conference will tell you to put the property in an LLC. Sometimes they are right. Often they are selling you the filing.

Here is what an LLC does, what it does not, and when it is theater.

What it actually does

An LLC separates the property from your personal assets, so that a judgment against the business is generally limited to what the business owns. That is the whole product. It is a real product and it is worth having when there is something to protect.

Note that an entity does not change who the platform deals with, and it does not change your tax obligations. A single-member LLC is generally disregarded for federal income tax — you still report the income.

When it is theater

• When the mortgage is in your name. Most residential loans cannot be transferred into an LLC without triggering a due-on-sale clause. Filing the LLC and leaving the deed alone protects nothing.
• When you sign everything personally anyway. If you personally guarantee the loan and the vendor contracts, the entity is a letterhead.
• When you run it out of your personal account. Commingling funds is the single most common way a court disregards the entity — which is exactly when you needed it.
• When you have no insurance. An LLC is not a substitute for liability coverage. It limits what a claimant can reach; insurance is what actually pays.

Still with me? Then when it genuinely earns its keep.

When it is worth it

• More than one property — separating them stops one bad event reaching the others.
• Partners. An operating agreement is genuinely useful the day somebody wants out.
• A commercial or DSCR loan that permits or expects entity ownership.
• Meaningful personal assets to protect, which is a real and specific reason rather than a general anxiety.

Also defined: STR Insurance