Personal name vs. LLC vs. S Corp

Trying to decide if I should buy my first rental property in my name (and get a million+ umbrella insurance policy) OR in the name of an LLC or an S Corp.

I’ve been surfing all day on the Internet trying to educate myself. Here’s what I found:

  1. The overwhelming majority state that the LLC arrangement is the way to go IF you have significant personal assets that you need to protect. One caveat though: LLCs do not offer asset protection if you are sued personally.

  2. The LLC is generally considered to the the superior vehicle for real estate ventures. However, LLC’s are relatively new and haven’t a lot of case law yet, adding to the risk. But for the single-person (I am single!!), the LLC is considered to be basically a sham and both the IRS and courts blow thorugh it like a tissue paper. Therefore, for single persons who won’t be taking on a partner, an S-Corp can be used to take advantage of the write-offs an S corp affords. (Not sure if the S Corp offers the same asset protection as an LLC.)

  3. Because it’s difficult or more costly (higher interest rates) in getting money as an LLC (and probably an S Corp), some suggest buying properties in a personal name, then transferring title and insurance to the LLC after closing. Of course, this would mean that I would need to endorse my current insurance policy to reflect the name change. No biggie in and of itself, but I learned that this can trigger the due on sale clause on most financing arrangements - though this may not be enforced. (Some said that they had never had a bank question their transfer to a LLC.) In addition to the above, I wonder if this tactic in getting cheaper money easier in and of itself may also be deemed to be “piercing the corporate veil”. (Curious to know if anyone has gone this route, and if they feel it’s worth the trouble and if so, if anyone had difficulties.)

  4. LLC and S Corp filing fees and annual reports/fees to the Secretary of State could be expensive and a pain. One person suggested setting up their LLC in Delaware as there is an annual LLC tax of $100 due each June 1, beginning the year following formation, and there is NO state income tax. (Certainly compelling, but is it doable?)

  5. In some states (not sure about TX), if properties are owned by an LLC, I cannot represent myself in Landlord Tenant Court - I must be represented by an attorney. (Not sure I wouldn’t want to go that route anyway, but wondering if anyone knows the answer to this issue for TX.)

Bottom line, protection of my personal assets and running my investment business like a BUSINESS are certainly motivating factors. Therefore, an LLC is extremely compelling. However, I am single and am extremely cognizant at all times on how to stretch my dollars. Therefore, the issues discussed in #3 (and to a certain extent #4) above, are certainly making me leery of buying properties in the LLC name (at least up front).

Know this is a long posting, but wanted to be as thorough as possible. Appreciate any thoughts anyone could share, especially you experienced investors out there. Thank you!!

P.S. My e-mail is


Welcome to the board. Glad to have you posting.

I’m glad you’re doing your homework. Having said that, I think you’re putting way too much effort into something that’s not that important in the short term.

What’s important is finding a great deal that puts money in your pocket and equity on your net worth statement. If you put as much energy into finding a great deal as you have researching entities I have no doubt your first deal will be awesome.

There’s nothing wrong with doing deals in your own name, especially the first few. You can always set up entities later. See if you’re even going to like being a landlord first before you go to the expense of setting up an entity.

You’ll need to have sufficient cash reserves set aside to “keep” or “hold” rental property. Funds that can be used to repair blown out A/C’s, water heaters, roofs, refrigerators, stoves, etc, etc. I spent over $1,000 last month replacing A/C’s, not to mention buying a new stove and 2 new refrigerators. Contrary to what many “guru’s” like to tell newbies, it does cost money to hold real estate.

This is a link to another post on this site where I answered a similar question.

Here is another link to an article Tim Randle wrote on the subject.

Good Luck.

Thanks for your quick response, Stacy. I very much appreciate your wisdom. I am definitely a newbie, and am trying to get up to speed as quickly as I can. It’s a bit overwhelming all the information out there, but it’s very exciting also.

10-4 on the cash reserve suggestion. Certainly realize that that this is not a money for nothing proposition - there will be money in … and money out.

Regarding the entity designation question, I will chill out for now. It’s just that everything I read gave me the impression that I needed to decide immediately. By the way, I did some more research after sending my original post and I found out that a person wanted to transfer property to an LLC and called his lender first to make sure the “due on sale” clause would not kick in. The lender told him that it was not a big deal to them, and they would still look to him to make the payments. So, sounds like calling the lender up front before making the LLC change may be the best way to go. It certainly would eliminate, or at least mitigate, any hassles or grief later.

Thanks again.


In your first point, you said that LLC’s do not protect you if you are personally sued. While that point is true, I believe that you need to think about what you are saying. Let me draw a couple of scenarios for you. You are driving down the street on a bright sunny day when you drop your cell phone and try to catch it. In the process, you lose control of your vehicle and hit a pedestrian on the sidewalk, paralyzing that person from the waist down. The pedestrian then sues you (personally) for negligence and then takes everything that you have, including ownership of you Real Estate LLC. This is a case where you would not be protected even if you had set up the LLC. Now for the second scenario. A pedestrian is jogging on the sidewalk in front of a rental property that you have set up in a LLC. He trips on an uneven sidewalk, breaks his back and is paralyzed from the waist down and sues the LLC (owner of the property) for negligence. The maximum that he could take would be the assets of the LLC. He would not be able to take your boat, or your extra car, or … If that property were held personally, you as the owner would be liable and all of your property could be attached. Most companies that put property into LLCs recommend that you put no more than 500K in any one entity. It makes them less appealing for those that want to take it away from you (court costs could be more than that). I think that if you have a net worth of less than 500K then it would not be a problem to hold property personally until start getting a little equity built up.

As far as your comments about the courts not upholding the LLC, I think if you were to do some research, you would probably find that the single member LLCs that are not upheld have not kept up with their paperwork. An LLC is a separate entity and must be treated as such to keep it separate. If you have an LLC that you treat as a sole proprietorship, the courts will act accordingly. There are several books available that will help you understand what you need to do to make sure that the courts uphold your LLC.

Now, for the disclaimer — I am not a lawyer and I am not rendering legal advise. I am merely repeating the information that I have been lead to believe is true. If you feel that you need a legal opinion, hire a lawyer.

Hope that this helps,

The asset-protection analysis here misses a key difference between corporations and partnerships.

Control of a corporation is through the voting of shares (for members of the Board), and shares are personal property. Because shares are personal property, they can be attached and taken when a judgment is executed. Whomever controls the right fraction of shares can control a corporation, and shares can be taken like a third car or a third home – they have no special protection. If a corporation is sued, generally the persons who own the corporation are not personally liable for the contracts and torts of the corporation (unless they would be individually liable, e.g., they were personally driving the car that hit the pedestrian in the above example, and the corporation was sued because it was a company car and the trip was company business). Corporations thus can be viewed as offering 1-way asset protection: protection for personal assets if the corporation is sued. A corporation who’s owners loot the company’s assets, comingle corporate and personal assets, disregard the corporation’s separeteness in their business dealings, and the like are like to to find that this 1-way asset protection will fall to an attenpt to “pierce the corporate veil” and reach the owner’s assets for liabilities of the corporation.

Control of a partnership is through partnership in the partnership. That is, it is a personal repationship between the partners. If a partner is sued in a personal capacity only, the assets of the partnership are not directly available to creditors any more than the assets of a corporation, but another advantage appears: the control of the partnership does not depend on the ownership of personal property such as shares. Because a partnership traditionally was not a creature created by statute but a common-law creature developed to describe the rights of people who entered business together without an entity, many of the rules on partnerships must be gleaned from the cases which describe how they work. Yes, much of this has been codified. What is not obvious is that since changing the identity of one of the partners – swapping him for one of his creditors, for example – would necessarily fundamentally change the partnership, this is not a permitted way to recover assets from people whose wealth is tied up in a partership. The way you must approach getting at these assets is to attach the income received by the particular partner who must satisfy the judgment. Thus, the partnership does business as usual, but the partner has trouble getting his paychecks. The partner might not have trouble driving a company car, though, or staying in a company residence provided for the supervision of adjacent property … a number of benefits which also benefit the partnership could be quite available. Also, the partnership may stop distributing anything. This makes attachment of the stream of distributions a problem – there aren’t any. Of course, the IRS still expects the partnership to file a K-1 naming the person(s) responsible for the tax on the money made by the partnership, even if the partnership doesn’t actually distribute any profit but keeps it for future development. And the person entitled to the distributions must pay the tax, or face the IRS. Thus, a creditor can find itself in the unfortunate position of paying your partnership share’s taxes while receiving no income. Very unhappy creditor … Thus, tradtional partnership could be viewed as 1-way asset protection, but in the other direction.

LLPs are statutory creatures which are like partnerships but provide partners protection from the acts of other partners, and the partnership itself. (In a traditional partnership, every partner is completely liable without limitation for every debt or obligation of the partnership, even a tort such as an auto accident or fraud committed by a different partner. Avoid being in ordinary partnerships if you have asset protection concerns!) LPs might be described as partnerships that can issue “shares” to investors who are not necessarily also full partners. LLLPs are a hybrid of LPs and LLPs, with the general partner(s) having limited personal liability as in the LLP. The LLP, created by statute in Texas, was the first entity in the US to offer 2-way asset protection.

So, what is an LLC? Developed in Wyoming, the LLC by statute has all the powers of a corporation and of a limited partnership. (The Texas LLC Act is available from the Texas web site. You can compare statutory filing requirements between corporations and LLCs and form your own opinion of which is trickier to get right.) The LLC’s forming documents can specify whether ownership is by control of personal property such as shares or is by membership in the LLC and a personal relationship not subject to attachment. The IRS currently allows LLCs to elect whether they are to be taxed as corporations or are “disregarded” for tax reasons like partnerships. The limitations of the corporations act governing voting, meetings, and the like do not limit the LLC, so if properly drafted it is easier to run without violating the statutes and opening an opportunity for piercing the corporate veil (letting those who sue it disregard it and seek assets of owners). LLCs are extremely flexible in their organization and can be found all over the country now. Because they are so flexible, it is certain that you want on drafted to fit your needs rather than a boilerplate kit, or you could do as well with an LLP. You can have a simgle-member LLC and you don’t have many filing requirements in Texas, so it’s easy not to botch the corporate formalities that sink so many small corporations when viel-piercing is attempted.

The point that the entities are subject to different state taxes is valid. LLCs pay franchise taxes just like corporations, based on either assets or gross receipts (look at the Texas Secretary of State’s website). LLPs pay a per-partner fee annually. These tax comments will no doubt be completely incorrect for any jurisdiction other than Texas.

The thing that people often screw up in their arrangement of entities for asset protection is failure to respect the separateness of the entities. Mixing funds in a common account, answering the debts of one with the assets of the other, writing personal expense checks from an entity’s account – all these support veil-piercing and limit the utility of the entities you’ve created.

While I am an attorney, I do not offer the above as legal advice for any specific person or for any specific application. This is an off-the-cuff informational note intended to provide some overview of the difference between partnership and corporate behavior in the face of a creditor’s attempt to execute a judgment. Please seek legal advice before acting. Advice which is informed by your actual needs and tailored to your situation will better serve you.

Find an attorney who knows and likes entities. Some have reasonable fees :slight_smile:

Very best regards,
Christopher Lewis

QUOTE: Mixing funds in a common account, answering the debts of one with the assets of the other, writing personal expense checks from an entity’s account – all these support veil-piercing and limit the utility of the entities you’ve created.

How do you fund company B from the assets of company A legally without creating support for veil-piercing?

If one company is owned by another and the ‘child’ company is sued, can the ‘parent’ company be liable and potentially lose all the companies they own?

Funds move between sister companies, between parents/subs, and between owners and their entities all the time. The important point is to be sure that each transfer has a legitimate business purpose, and is not evidence the companies are not being used as one big bank account, and do not constitute a fraud on the public. Some examples of transfers include dividends, sales, leases, or funds transferred pursuant to a promissory note, salary, stock/bond issuance, or other reason.

To avoid making a veil-piercing mistake, consulting an attorney is advised.

Best regards,
Christopher D. Lewis

Thank you Christopher, I am new to this.