Posted by JPiper on March 18, 1999 at 11:23:48:
Let me preface this by saying that I’m not a CPA or attorney. In fact, I’m struggling with some of these questions myself.
First, my opinion is that a LLC potentially offers better asset protection than an S Corp for situations where you are holding property. Execution of a judgment against you when you are the shareholder of a corporation could easily result in losing control of the property. In an LLC execution of a judgment is by charging order in general. The charging order gives the creditor the right to any income distributions, but not the right to the property. Accordingly, it may be possible to cease distributions, leaving the creditor with no distributions until the dissolution of the LLC but leaving them with a tax liability for the undistributed income. My statements are general, not specific, and you should have these statements reviewed by legal counsel. Further, there may be tax considerations which are unique to you that would make an LLC or a S corp preferable for you personally. My general feeling is that an LLC is a better vehicle than an S Corp for holding property.
In general I would say that it’s safer from an asset protection point of view to have properties in an individual LLC rather than to have all your properties in one larger LLC. However one of the factors that you also need to consider are the cost factors associated with forming and maintaining an LLC. There’s probably a limit as to how many LLC’s would be desirable from a cost standpoint, notwithstanding the benefits from an asset protection viewpoint. This is a question you will need to answer for yourself.
Between you and me, I think the issues surrounding what is “best” are quite complicated. There’s a cost to form the LLC, perhaps an ongoing cost to maintain it at the state level, perhaps additional paperwork concerns, insurance issues, tax considerations, lender issues, etc. Sometimes the advice you see concerns only the asset protection aspects?.not all the other aspects involved in the decision.
But if I were going to hold property, an LLC would be my choice. I would probably combine properties in an LLC, but not all properties. I’d separate some property in some fashion.