both of these entities are creatures of statute. and, generally speaking, they equal asset-protection qualities.
the LLC is simpler. you have members (owners–like shareholders in a corporation or partners in a partnership). and you have managers (like corporate officers–they rn the LLC).
The LP has an added complication. you have Limited partners and at least one General Partner. The General Partner has unlimited liability, so you do not want an individual serving as GP. you will need to have an entity serving in that capacity, like an LLC.
unless there is a state-specific reason to use an LP, the LLC is simpler, and cachieves the same results.
[and by the way, there COULD be such a reason. In TX, prior to a change in the law in 2006, the preferred structure involved an LP with an LLC as GP. this structure avoided the franchise tax. but not anymore. so today, TX investors are better served with an LLC. check with a local expert]
I own a few small multi-family properties in Chicago area. When I first started I used the simplest entity (sole proprietorship) which was a bad idea because if offered no liability protection. Now Iâ??m considering changing from sole proprietor to either LLC or LP. In Illinois, LLC is more expensive than LP. However does LLC offer more protection than LP? How do you guys do it?
Would incorporating (LLC or LP) take away the loss that passes through to the owner (up to $25,000 per year)?
Like most real estate investors, I have two major assets: liquid assets and real property assets. In Ray Alcornâ??s book (very good book), he recommended every investor to protect both assets. The liquid assets could be put the in Nevada LLC and the equity of the real property could be drained out by debt. If I have to do all of that, I would have at least 3 tax returns to file every year: (1) tax return from for my LLC rental business, (2) tax return for my liquid asset Nevada LLC, and (3) my personal tax return. That sounds like a lot of work and expenses. Just wonder how do other small investors deal with this?
The short answer is that renters like yourself file 3, or more tax returns. Yes, its expensive, but its the cost of doing business. Also, with a LP, one person has to assume liability as the general partner. An LLC has the advantage of not requiring a general partner to accept full liability. Finally, if you plan to continue purchasing properties, I recommend a series LLC so that you can segregate the liability of one property from the other; each will have to file a separte tax return, but you save yourself the expense of setting up several LLCs to accommodate each property.
The question you pose varies for different situations. It really depends on what your assets are, how much equity is there, and how much positive cash flow. The first thing you want to have is adequate insurance coverage. That should be your first line of defense.
I’m not familiar with Illinois law (so check this out for yourself), but I would suggest an LLC. It is simple. Set it up to be manager-managed with you as the manager. LLC’s have a tax-through provision so you do not have to file a separate tax return. Have the members be trusts rather than you personally. Have both the trust and LLC state that distributions are discretionary and not required and not subject to assignment, etc… The LLC is to protect you from lawsuits against your business, and the trust is to help protect your LLC against lawsuits against you personally.
I usually suggest that most small investors just have enough insurance to protect them until the initial setup costs and yearly costs are warranted. Remember if your property is mortgaged to the hilt and has little positive cash flow, what is there for creditors to get? An LLC may help protect assets, but it will not stop you from being sued or provide money for your defense.
Also, don’t forget that if you set up an LLC, then run it like a business. Its own checking account. Any money paid to you show as a distribution or a management fee.