Benefits and Pitfalls of Using LLC on Purchase of Every Property

LLC are being discussed a lot these days. From its literal meanings to more complex discussions, LLC is one of the hot topics. What I am going to discuss here are the scenarios in which LLC can be beneficial, and also the scenario in which LLC can be disadvantageous. However, before jumping into this detail, it would be worth mentioning what LLC is.

LLC, also known as Limited Liability Company, is a structure according to which the members of company cannot be held liable for the company’s debts. LLC is made to be a hybrid, i.e. it acts as a corporation as well as partnership. While a corporation can get the services like limited liability through this structure, LLC can also facilitate partnerships through flow-through taxation.

Incorporating this concept into the property purchase gives some advantages, but there are some pitfalls as well. So, it brings up the question whether or not one should go for the use of LLC upon the purchase of every property.

The pros
  • If the new purchase deal you are working on involves dealing with several owners, having separate LLC for this particular deal can help you identify the extent at which each owner has the authority.
  • While investing in an out-of-state property, you would want to stay away from risk. In this scenario, having LLC for purchasing a property surely makes sense.
  • The biggest problem with house flipping is about the taxes, i.e. you would have to pay a lot of them. By using LLC in a bit smart manner, you can get a relaxation when it comes to taxes and liability.
  • The major benefit of purchasing each property under new LLC is that it allows you to compartmentalize every purchase from the other. With that said, if the purchase of one of your properties is being affected by a liability claim, it won’t affect other purchase deals that you would make. In other words, a separate LLC will help you each one of your purchase deals unaffected from the inconsistences of other deals.

The pitfalls
  • While there certainly are advantages of purchasing each property under new LLC, one big pitfall is the higher price. In some states, you might need to pay fee to file a return and fee to CPA alongside paying for setting up LLC.
  • If you include several deals under one LLC, it would help you increase your portfolio. This extended portfolio is a handy record based on which you can apply for loan. On the other hand, setting new LLC for every purchase would make it difficult to get the necessary financing that is required to purchase a home.

To get more info regarding pros and cons of having new LLC for each property, play the video.