Whether acquiring a rental property, purchasing a building for your business, or protecting personal assets, one of the first questions you’ll face is whether to use a legal entity, and if so, which one.
This article discusses common entity structures used to hold real estate. It is not legal advice, and investors should consult a tax professional regarding state law and asset-protection considerations.
Choosing the right structure can limit liability, preserve tax flexibility, and prevent costly restructuring later. Unfortunately, the differences between LLCs, S corporations, and C corporations are often misunderstood.
Why Use an Entity?
Holding real estate in your personal name exposes your personal assets to potential claims. Tenant injuries, contractual disputes, or lawsuits can put your home, savings, and other investments at risk. While insurance is essential, it does not guarantee complete protection.
Using a legal entity can:
- Limit personal liability
- Provide clearer ownership structure
- Offer flexibility for tax and estate planning
Once you decide to use an entity, the key question becomes which entity to use.
Limited Liability Company (LLC): The Preferred Structure
Best for:
Most buy-and-hold real estate investors.
Liability Protection
An LLC creates a legal separation between the property and the owner’s personal assets. Claims related to the property are generally limited to assets held by the LLC, provided entity formalities are respected and funds are not commingled.
Tax Treatment
LLCs are pass-through entities by default:
- Single-member LLCs are taxed as sole proprietorships
- Multi-member LLCs are taxed as partnerships
Rental income, expenses, depreciation, and gain flow directly to the owners, avoiding entity-level income tax. Some states impose minimum fees or franchise taxes.
Although an LLC may elect S-corporation or C-corporation tax treatment, this is rarely advisable for real estate.
Flexibility
LLCs offer:
- Flexible ownership and distribution provisions through the operating agreement
- Easier restructuring than corporations
- The ability to transfer interests or property without triggering corporate-level tax
Cost
LLCs are generally inexpensive to form and maintain. For example, California imposes an $800 annual LLC tax plus a gross-receipts fee once income exceeds $250,000.
Bottom line:
For most investors, holding real estate in an LLC is the default and preferred option.
C Corporation: Usually a Tax Trap
Best for:
Operating businesses—not real estate.
Tax Treatment
C corporations are subject to double taxation:
- Tax at the corporate level
- Tax again when profits are distributed to shareholders
Real estate can be contributed to a C corporation tax-free, but it generally cannot be distributed or sold without triggering tax.
When a C corporation sells real estate:
- Gain is taxed at the corporate level
- Remaining proceeds are taxed again when distributed
Bottom line:
Holding real estate in a C corporation is almost always a mistake unless a highly specialized strategy applies.
S Corporation: Poor Fit for Appreciating Property
Best for:
Operating businesses—not real estate holdings.
Tax Complications
Although S corporations avoid double taxation, real estate introduces major issues:
- Distributions of appreciated property trigger taxable gain as if sold at fair market value
- Tax may be due even when no cash is distributed
Some states impose entity-level taxes (e.g., California’s 1.5% S-corp tax), further reducing efficiency.
Structural Limitations
- Ownership restrictions (generally U.S. individuals and certain trusts only)
- Mandatory pro-rata distributions
- Improper distributions can terminate S-corp status
Bottom line:
S corporations are not designed to hold appreciating assets and frequently result in unfavorable tax outcomes for real estate investors.
Do You Have to Use an Entity?
No. Real estate can be held personally or as tenants in common. However, no entity means no liability protection.
A common alternative is the single-member LLC (SMLLC). For federal tax purposes, an SMLLC is typically a disregarded entity under the IRS “check-the-box” rules, while still providing liability protection under state law.
This structure often offers:
- Pass-through taxation
- Limited liability
- Minimal administrative burden
When Multiple LLCs Make Sense
As portfolios grow, investors may use multiple LLCs to isolate risk. Grouping properties by risk level or value can limit exposure if a claim arises.
Example:
One LLC holds lower-risk, long-term rentals, while another holds higher-turnover or higher-risk properties. Liability is generally contained within each entity.
Bottom Line
For most real estate investors—especially those early in their investing journey—an LLC is the simplest and most effective ownership structure.
It provides:
- Personal liability protection
- Flexible ownership and distributions
- Pass-through taxation
- The ability to move assets without unnecessary tax consequences
A brief conversation with a CPA or tax advisor before purchasing property can prevent expensive mistakes and unnecessary restructuring later.
How We Can Help
We work with investors to evaluate entity options, analyze tax implications, and structure ownership to protect assets and support long-term growth.
Whether you’re buying your first rental or expanding your portfolio, we help you make informed decisions from day one.
Contact us to discuss the right structure for your real estate investments.