LLC vs Corporation: Can You Do Without Either?

When it comes to choosing how to hold your real estate investments, you can choose from many options. The most popular options are using an LLC to own real estate or a corporation. Some decide that they would prefer to hold title to their real estate investments in their own name. Is it wise to own investment real estate properties in your own name?

Q: I have tried unsuccessfully to find an article you wrote several months ago regarding the preferred organizational structure for an individual (and possibly his spouse- no other partners) to own rental real estate. We’re trying to decide whether to hold the property as individuals, in a limited liability corporation (LLC) or in an S Corporation. Holding the property in an LLC or an S Corporation involve substantial accounting and tax filing fees each year. Instead of going that route, couldn’t we just buy an insurance policy of sufficient size to give us the same liability protection? I'm just a small time investor seeking to start investing in rental real estate and am planning to own as many as 10 single family residences.

A: The answer to your question will depend on many factors including your willingness to put up with the paperwork required to keep and maintain an LLC. There are reasons why people choose to put property into an LLC vs an S Corporation. Some of this has to do with liability protection, but there are estate reasons and tax reasons to choose these forms of ownership as well. You can do hold property as an individual. And you can buy a lot of liability insurance – maybe more than you need.

To fully protect yourself you might need a $5 or $10 million policy, or more. People are a little crazy and litigious today. If you own each property in a separate LLC, the litigation that affects one property shouldn’t affect the other properties. If you and a tenant get into a dispute and the issue isn’t covered by any of the insurance policies you buy, that tenant could sue you and that suit could affect your ownership in all of the properties.

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