Which LLC is Right For Your Business?

Type 1: Rental Property LLC [00:09]

• This type of LLC is primarily for asset protection, used for rental properties.
• It is typically single-member, meaning no partners, and flows income to the owner's personal return (Schedule E).
• The main purpose is to shield personal assets from liabilities arising from the rental property, such as tenant injuries.
• It's advised to set up an LLC for a rental property as soon as it's acquired, and not to worry about the mortgage's "due on sale" clause, as banks generally understand and permit transfers to wholly-owned LLCs.
• For multiple properties, the decision to use one LLC or multiple depends on equity. If equity per property is low (e.g., $10,000), one LLC might suffice. However, if equity is high (e.g., $200,000 per property), separating them into different LLCs is recommended to mitigate concentration risk.
• The LLC should be set up in the state where the property is located, not where the owner resides, to benefit from local legal protections.

  "This is type one diabetes. Type one LLC. Yeah. Yeah."

Type 2: Small Business LLC [07:53]

• This LLC is for the small business owner, side hustle, or side gig, with no outside partners; it can be husband and wife or an individual.
• It provides protection from accidents related to the business operations (e.g., customer injury) and offers legitimacy for vendors, employees, and customers.
• This type of LLC does not offer tax savings; deductions like car or home office write-offs are available without an LLC.
• It's crucial not to mix rental properties with a small business in the same LLC to maintain asset protection.

  "It's just that new side hustle, side gig, small business, no partners."

LLC Taxed as an S-Corporation [10:20]

• This is a crucial tax strategy for businesses generating significant income, moving beyond the basic small business LLC.
• The S-corp election allows owners to save on self-employment taxes (Social Security and Medicare) by taking a reasonable salary and the remainder as dividends or profits, which are not subject to self-employment tax.
• For example, someone making $100,000 net income could save $8,000-$9,000 annually on self-employment taxes.
• It's recommended for professionals and business owners making over $50,000 annually.
• Concerns about "reasonable compensation" are addressed, stating that accountants who are overly cautious are giving bad advice, and audits for not taking "reasonable comp" are rare if handled carefully.
• Millions of Americans utilize this strategy, including public figures like Joe Biden and Jill Biden.

  "Babe, it is now time to convert your LLC to an SC corp, an SC corporation LLC."

Type 4: Multi-Member LLC / Partnership LLC [19:23]

• This type of LLC involves two or more partners and requires a separate partnership tax return (Form 1065).
• Examples include real estate partnerships (e.g., owning commercial rental property) or operating businesses where partners own stakes, potentially through their own S-corporations.
• The partnership LLC receives income, pays expenses, and then distributes funds to the partners, who may be individuals or their respective S-corporations.
• Strategic reasons for a two-member LLC can include second marriages or specific asset protection needs.

  "The point of it is you have a partner in the business."

Series LLC [23:35]

• This LLC structure is available in about 20 states and allows a single master LLC to establish multiple sub-series, each with separate liability treatment, without needing to file separate LLCs with the state.
• It is particularly beneficial for real estate investors with multiple properties, as each property can be housed in its own subseries within the master LLC, offering enhanced asset protection.
• The Series LLC is an enhanced asset protection strategy for segregating liability across different assets or business lines.
• It can be structured as single-member or multi-member.

  "This is an LLC that about 20 different states have. Not every state has a series LLC."

COPE LLC (Charging Order Protection) [26:03]

• This type of LLC is focused on protecting the value of assets rather than the quantity of assets or properties.
• COPE protection shields assets from personal liabilities. If an individual is sued personally (e.g., for a drunk driving accident where insurance doesn't cover the full claim), a creditor typically cannot force the sale of assets held within a COPE LLC. Instead, they can only get a charging order against the LLC's interest.
• Wyoming is a prominent state for COPE protection, even for single-member LLCs.
• This is considered advanced planning, generally recommended for individuals with over $1 million in net worth or those with significant privacy concerns.

  "So, the COPE is a called a charging order protection entity."

Special Purpose LLC (IRA LLC) [30:32]

• This is a specialized LLC that can be owned by an Individual Retirement Account (IRA).
• The IRA can own an LLC entirely or partner with others. The LLC can have a business checking account and engage in various investments, including real estate, private companies, or cryptocurrency.
• Often referred to as a "checkbook control IRA," this structure allows self-directed IRA investors to manage their investments more directly.
• Resources like books and podcasts are available to explain this structure in detail.

  "This is a special LLC that is allowed to uh be owned by an IRA maybe."

PLLC (Professional Limited Liability Company) [31:56]

• This is a specialized LLC designed for licensed professionals such as doctors, dentists, lawyers, and architects.
• It provides protection against each other's professional liabilities, meaning one partner's professional malpractice does not necessarily expose the other partners' personal assets or businesses.
• The PLLC structure ensures that professionals can partner together while mitigating the risk associated with individual professional negligence.
• Certain professions, like licensed therapists in California, are required by their licensing boards to form a PLLC.

  "This is called the PLLC or a professional limited liability company."