Why Your California Rental Property Doesn’t Need an LLC

Walk into any real estate investing seminar, scroll through any landlord forum, or talk to any newly minted property investor, and you’ll hear the same gospel: put your rental properties in an LLC. It’s repeated so often and with such conviction that questioning it feels like heresy.

But for most California landlords, especially those with one to five properties, forming an LLC for each rental is expensive, administratively burdensome, and provides far less protection than you’ve been promised. The corporate veil you’re counting on is tissue paper. The liability protection is largely illusory. And the cost-benefit analysis, when you actually run the numbers honestly, doesn’t pencil out.

Here’s what the LLC promoters aren’t telling you about rental property ownership in California.

The Fundamental Misunderstanding

The main pitch for holding rental property in an LLC goes like this: if a tenant slips and falls, or if there’s a lead paint issue, or if something terrible happens at your property, they sue the LLC, not you. The LLC’s only asset is the rental property, so the most you can lose is that one property. Your personal house, your bank accounts, your other assets remain safe behind the corporate veil.

This sounds ironclad. It’s not.

First, you’re still going to get sued personally. California allows plaintiffs to sue anyone who might be liable, and they routinely name both the LLC and the individual owners. Every competent plaintiff’s attorney will sue the entity and pierce the corporate veil in the same complaint. They’ll allege you failed to maintain the property, you personally knew about the dangerous condition, you were negligent in your management, you commingled funds, you didn’t maintain corporate formalities, or any of a dozen other theories that pull you in as an individual defendant.

The LLC doesn’t shield you from your own negligence. If you knew the deck was rotting and someone falls through it, you’re personally liable regardless of what entity holds title. If you personally managed the property and failed to address a habitability issue, you’re personally liable. If you were involved in the decision-making that led to the injury, you’re personally liable.

The corporate veil only protects you from the LLC’s contractual obligations and from strict liability claims where you had no personal involvement. That’s a narrower category than most landlords realize.

The Personal Guarantee Problem

Here’s a scenario that plays out constantly: You form an LLC to buy a rental property. You go to get financing. The lender says fine, we’ll lend to your LLC, but you need to personally guarantee the loan.

You sign the guarantee because you want the property. Now the LLC owns the property, but you’re personally on the hook for the debt. If the LLC defaults, the lender comes after you personally. The corporate veil provides exactly zero protection.

“But wait,” you say, “the LLC still protects me from liability claims, even if not from the mortgage.” Sure. But now ask yourself: what’s the largest financial risk associated with a rental property? In most cases, it’s the mortgage. The property is leveraged at 70% or 80% of its value. The mortgage payment is your biggest monthly expense. If something goes wrong financially, the mortgage is what kills you.

And you’re personally liable for it anyway.

Most small landlords personally guarantee their mortgages, their business lines of credit, their contractor relationships, and their management agreements. They’ve voluntarily pierced their own corporate veil before the property even cash flows. The LLC becomes a paperwork exercise that costs $800 per year in California franchise tax while providing negligible actual protection.

The Cost Analysis Nobody Does

Let’s run the actual numbers on holding a California rental property in an LLC.

California charges an $800 minimum franchise tax per LLC per year. If you follow the conventional wisdom and put each property in its own LLC for maximum “protection,” you’re paying $800 annually per property just for the privilege of having an LLC.

You also need a registered agent if you’re not comfortable being your own (many people aren’t). That’s another $100 to $300 per year per LLC.

You need to file a Statement of Information with the California Secretary of State every two years. That’s $20, but if you’re paying someone to do it, add another $50 to $100.

You need to maintain separate books and records for each LLC. Separate bank accounts. Separate accounting. If you’re paying a bookkeeper or CPA, the per-entity cost adds up fast.

You need to file a separate tax return for each LLC (or at least include it in your Schedule E if you’ve elected disregarded entity status). More CPA fees.

Annual cost per LLC: conservatively $1,000 to $1,500 when you add it all up. For a landlord with three properties, that’s $3,000 to $4,500 per year in entity maintenance costs.

Now compare that to insurance. A $1 million umbrella policy costs around $200 to $400 per year. A $2 million policy costs $300 to $600. These policies cover all your properties and your personal liability. They actually pay claims. They provide a defense. They settle cases.

You’re spending three to four times as much on LLC maintenance as you would spend on insurance that provides broader, more reliable protection. And we haven’t even gotten to the insurance you still need even with an LLC, because no competent landlord operates without general liability coverage regardless of their entity structure.

Insurance Actually Works

Here’s what happens when a tenant sues over a slip-and-fall. If you have proper landlord insurance and umbrella coverage, you tender the claim to your insurance carrier. They assign a defense attorney. They investigate. They negotiate. If they can’t settle, they defend you at trial. If you lose, they pay the judgment up to your policy limits.

This actually happens. Insurance companies pay claims every day. The system works. It’s predictable. It’s tested.

Here’s what happens when a tenant sues you and your LLC, alleges you personally knew about the dangerous condition, pierces the corporate veil, and gets a judgment against you personally: your LLC provides no protection. You wish you’d bought more insurance.

The insurance vs. LLC debate isn’t really a debate. You need insurance regardless. The LLC is an expensive additional layer that might provide marginal additional protection in specific scenarios, but usually doesn’t.

The Corporate Formalities Trap

The corporate veil only protects you if you maintain corporate formalities. This means:

• Separate bank accounts for each LLC
• No commingling of funds between entities or between entity and personal accounts
• Proper capitalization of the LLC
• Written operating agreements
• Formal documentation of major decisions
• Arm’s length transactions between you and the LLC
• Proper accounting and record keeping
• Filing all required state forms on time

Most small landlords fail at this within six months. They pay a personal expense from the LLC account because it’s easier. They transfer money between LLCs without proper documentation because they own both and it seems silly to formalize it. They don’t hold meetings or document decisions because they’re the sole member and who are they meeting with, themselves?

Then someone sues. The plaintiff’s attorney requests production of corporate records. You produce spotty documentation, commingled accounts, and no evidence of corporate formalities. The plaintiff moves to pierce the corporate veil. The court grants it because you treated the LLC as your alter ego.

The protection you paid for evaporates because you didn’t maintain the paperwork discipline required to keep it. This is the dirty secret of LLCs: they only work if you treat them like real separate entities, which is expensive and annoying and contrary to how most small landlords actually operate.

The Single-Member Problem Redux

Most landlords who use LLCs are the sole member. They own 100% of the entity. This creates several problems.

First, as discussed in the asset protection context, courts are increasingly willing to disregard the corporate veil for single-member LLCs because there are no other members whose interests need protection. The whole theory of limited liability is partly based on protecting innocent co-owners. If you’re the only owner, that rationale disappears.

Second, single-member LLCs are more easily characterized as your alter ego. When you’re the sole member, sole manager, sole decision-maker, and sole beneficiary, the LLC looks less like a separate entity and more like a legal fiction you’re hiding behind. Courts are more willing to pierce the veil.

Third, single-member LLCs invite scrutiny on fraudulent transfer issues if you transferred the property to the LLC after purchasing it personally. If you bought the property in your name, then later deeded it to your newly formed LLC, that’s a transfer. If you did it after you had creditor problems, or if a court decides you did it to hinder creditors, the transfer can be voided.

The solution asset protection gurus offer is to make your spouse or kids members of the LLC. But this creates its own problems. You’ve now actually given away partial ownership of your property. In a divorce, your spouse legitimately owns part of the LLC. If your kid gets sued, their LLC interest is reachable by their creditors. You’ve solved a theoretical veil-piercing problem by creating actual co-ownership problems.

You’re Still Liable for Your Own Actions

This cannot be overstated: the LLC does not protect you from liability for your own negligent acts.

If you personally manage the property and fail to fix a dangerous condition you knew about, you’re personally liable. The LLC doesn’t shield you.

If you personally discriminate against a tenant in violation of fair housing laws, you’re personally liable. The LLC doesn’t shield you.

If you personally enter into a contract and breach it, you’re personally liable. The LLC doesn’t shield you.

If you’re the sole member and manager, courts will often find that you were the one making decisions and taking actions, which means you’re personally liable even though those actions were technically done in the LLC’s name.

The corporate veil protects you from vicarious liability for the actions of others and from strict liability where you had no personal involvement. It doesn’t protect you from being held accountable for your own conduct. Since most landlord liability arises from the landlord’s own decisions about maintenance, repairs, tenant selection, and property management, the LLC provides less protection than advertised.

The Due-on-Sale Problem

Many landlords don’t realize that transferring property from their personal name to their LLC can trigger the due-on-sale clause in their mortgage. When you deed property to an LLC, you’re technically transferring ownership. Most mortgages contain provisions allowing the lender to call the entire loan due if the property is transferred without their consent.

In practice, many lenders don’t enforce this if you’re still making payments, especially for single-member LLCs where you’re the sole owner. But they can enforce it. And some do, especially if they want to get out of a low-interest loan.

You might need to refinance the property in the LLC’s name, which means paying closing costs again, potentially getting a worse interest rate, and definitely personally guaranteeing the new loan anyway (which brings us back to the personal guarantee problem).

Some landlords just deed the property to the LLC and hope the lender doesn’t notice. This is rolling the dice. If the lender finds out and calls the loan, you’re scrambling to refinance or sell. Not ideal.

The Financing Disadvantage

Properties held in LLCs are harder to finance than properties held in your personal name. Many portfolio lenders won’t lend to LLCs at all. Those that will often charge higher interest rates, require larger down payments, or impose stricter terms.

If you have four properties in four different LLCs, you’re dealing with four different entity relationships with potential lenders. It’s more complicated to refinance. It’s more complicated to do cash-out refinances. It’s more complicated to establish banking relationships.

Some landlords solve this by forming the LLC after purchase, once the property is financed in their personal name. But this brings us back to the due-on-sale issue and the potential fraudulent transfer issue if you do it after you have creditor problems.

The False Sense of Security

Perhaps the most dangerous aspect of the LLC-for-rentals advice is that it gives landlords a false sense of security. They form the LLC, pay their $800 annual franchise tax, and think they’re protected. So they skimp on insurance. They defer maintenance. They take risks they wouldn’t take if they understood their actual exposure.

The LLC becomes a psychological security blanket rather than actual protection. The landlord thinks, “It’s fine, the LLC protects me,” and makes decisions accordingly. Then something goes wrong, they get sued personally, the corporate veil gets pierced or was never effective in the first place, and they’re personally exposed with inadequate insurance.

This is worse than having no LLC at all, because at least without the LLC they’d know they were exposed and might buy proper insurance or take fewer risks.

When LLCs Might Make Sense

I’m not saying LLCs are never appropriate for rental properties. There are scenarios where they make sense:

If you have more than five or six properties, the economy of scale starts to work better. You’re going to have sophisticated accounting anyway. You probably have a property manager. You’re running this as a real business, not a side investment. The per-property cost of maintaining LLCs becomes proportionally smaller relative to your overall operation.

If you have multiple unrelated partners owning properties together, an LLC provides a good governance structure. It clearly defines everyone’s rights and obligations. It provides liability protection between partners. The operating agreement specifies what happens when someone wants to sell, dies, or has a falling out with the others.

If you’re doing sophisticated estate planning and using LLCs to gift minority interests to children at discounted values for estate tax purposes, the LLC serves a real purpose beyond liability protection.

If you have properties in multiple states, using LLCs in each state simplifies probate avoidance and can provide some state-specific benefits.

If you’re syndicating deals or raising money from passive investors, you need an LLC for securities law compliance and investor relations.

But if you’re a California landlord with one to three properties, managing them yourself or with a property manager, the LLC is probably costing you more than it’s protecting you.

What Actually Protects You

Real protection for California landlords comes from boring, unglamorous practices:

Adequate insurance. $1 million minimum general liability coverage. $2 million umbrella policy covering all your properties. Proper endorsements for rental activities. This is your first line of defense and it actually works.

Proper property maintenance. Fix things promptly. Address safety hazards immediately. Document everything. Most landlord liability arises from deferred maintenance and known dangerous conditions. If you maintain your properties properly, your litigation risk drops dramatically.

Professional property management. A good property manager handles tenant screening, maintenance coordination, lease enforcement, and regulatory compliance. They’re professionals who know what they’re doing. They reduce your liability exposure more than any entity structure.

Proper documentation. Written leases. Documented communications with tenants. Proper notices. Move-in and move-out inspections with photos. When disputes arise, documentation is your friend.

Regulatory compliance. Know and follow California’s landlord-tenant laws. They’re tenant-friendly and violation can result in serious penalties. An LLC won’t protect you from regulatory enforcement actions.

Arm’s length tenant relationships. Don’t rent to family or friends unless you’re prepared to evict them like any other tenant. Personal relationships cloud judgment and lead to problems.

Conservative underwriting. Don’t over-leverage. Don’t buy problem properties planning to fix them up unless you have the capital and expertise to do it right. Financial stress leads to deferred maintenance which leads to liability.

None of this requires an LLC. All of it reduces your actual risk more than entity structuring.

The Probate Avoidance Myth

Some advisors pitch LLCs as probate avoidance tools. “If you die, the property is in the LLC, so it avoids probate!”

Wrong. If you own 100% of the LLC, your LLC membership interest is part of your probate estate. It goes through probate just like the property would if you owned it directly. You’ve avoided nothing.

The correct probate avoidance tool for California real estate is a revocable living trust. Transfer your properties (or your LLC interests, if you have them) to your revocable trust. Now they avoid probate. The trust is also more flexible for estate planning, easier to administer, and doesn’t cost $800 per year in franchise tax.

If someone is selling you an LLC primarily for probate avoidance, they either don’t understand California probate law or they’re hoping you don’t.

The Tax Neutrality Red Herring

LLC promoters often tout the “tax flexibility” of LLCs. Single-member LLCs are disregarded entities for tax purposes, meaning they’re treated as sole proprietorships. Multi-member LLCs are partnerships unless they elect otherwise. LLCs can elect to be taxed as S corporations or C corporations if they want.

This is all true but largely irrelevant for most rental property owners. If you’re holding rental property in your own name, you report it on Schedule E of your personal tax return. If you hold it in a single-member LLC, you report it on Schedule E of your personal tax return. The tax treatment is identical.

If you have a multi-member LLC, it files a partnership return (Form 1065) and issues K-1s to the members, who report their share on their personal returns. This is more complicated but the actual tax is the same as if you owned the property as tenants in common and each reported your share on Schedule E.

The LLC doesn’t save you taxes on rental property. It doesn’t give you different deductions. It doesn’t change your depreciation schedule. It’s tax-neutral at best, and possibly more expensive if you need to pay someone to prepare the entity returns.

Some people elect S corporation status for their rental LLCs hoping to save on self-employment tax. This doesn’t work. Rental income isn’t subject to self-employment tax anyway, whether you’re a sole proprietor or an LLC or an S corp. The election accomplishes nothing except additional tax return preparation fees.

The “Series LLC” Scam Revisited

We discussed series LLCs in the asset protection context, but they’re worth revisiting here because they’re aggressively marketed to rental property owners.

The pitch: instead of forming five separate LLCs for your five rental properties (costing $4,000 per year in franchise tax), form one series LLC with five series, each holding one property. You only pay $800 per year for the master LLC, and each series supposedly has liability protection from the others.

California doesn’t allow series LLCs. If you form one in Delaware or Nevada, California won’t recognize the separate series as distinct entities. A creditor of one series can potentially reach all the assets because California treats the entire series LLC as one entity.

You’ve paid for expensive, complex structuring that provides no actual protection in California. You’re also paying California’s $800 franchise tax anyway because your Delaware series LLC is doing business in California and must register as a foreign LLC.

The Legitimate Business Purpose Test

California courts look skeptically at entity structures that lack legitimate business purposes. If it appears you formed an LLC solely to avoid creditors or liability, courts are more willing to disregard the entity.

This is particularly relevant if you transfer property to an LLC after you already own it. If you bought a rental property in 2020 in your personal name, then in 2024 you transfer it to a newly formed LLC, courts will ask why. If the answer is “I was worried about liability,” that’s admitting you formed the entity to shield assets from creditors. This makes it easier to pierce the veil or to set aside the transfer as fraudulent.

The entity needs legitimate business purposes beyond liability avoidance. Professional management. Partnership with other investors. Succession planning. Estate tax benefits. If liability avoidance is the only purpose, you’re on shaky ground.

The Compliance Burden

Every LLC requires ongoing compliance:

Annual Statement of Information filed with California Secretary of State ($20 every two years).

Annual franchise tax payment ($800 minimum, due regardless of income).

Separate tax return or Schedule E attachment.

Separate bank account and accounting records.

Operating agreement maintenance.

Proper documentation of major decisions.

Proper handling of capital contributions and distributions.

Annual meetings (even if you’re meeting with yourself).

For landlords with day jobs, this compliance burden is real. Miss your franchise tax payment? You get penalties and interest. Miss your Statement of Information? You get penalties and potential suspension of your LLC. Comingle funds? You’ve potentially voided your corporate veil protection.

The LLC requires discipline and attention. Most small landlords underestimate this ongoing burden when they form the entity. Six months later they’re irritated by the paperwork and cutting corners, which defeats the purpose of having the LLC in the first place.

The Marketing Machine

The rental property LLC advice is perpetuated by a marketing machine that benefits from it:

Entity formation companies make money on each LLC formation. More entities means more revenue.

Attorneys who do a lot of entity work benefit from annual compliance services, amendments, and ongoing representation.

Real estate investing gurus sell courses and books promoting LLC structures as sophisticated wealth-building strategies.

The advice has become conventional wisdom, repeated in echo chambers until it seems unchallengeable. To question it is to mark yourself as unsophisticated or naive.

But conventional wisdom isn’t always correct. Sometimes it’s just conventional. The fact that everyone says you need an LLC for your rental property doesn’t make it true. It makes it a good business model for people selling LLC services.

The Bottom Line for California Landlords

If you’re a California landlord with a small number of properties, holding them in your personal name (or in a revocable trust for estate planning) with proper insurance is likely the better choice. You’ll save the annual LLC costs, avoid the compliance burden, have better financing options, and be protected just as well by insurance that you need anyway.

The LLC provides a narrow band of additional protection in specific scenarios where you’re vicariously liable for others’ actions and where you’ve maintained perfect corporate formalities. For most small landlords, this scenario rarely materializes, and when it does, insurance handles it.

If you do decide to use LLCs, do it properly. One LLC per property for maximum liability segregation, if you’re going to do it at all. Maintain scrupulous corporate formalities. Keep perfect records. Use separate bank accounts. Document everything. Treat the LLC as a real separate entity, not as a tax dodge or paperwork fiction.

Better yet, buy more insurance, maintain your properties properly, use a good property manager, and skip the LLC entirely. You’ll save money, reduce hassle, and sleep just as well at night knowing that your insurance company will actually defend and indemnify you if something goes wrong.

The rental property LLC isn’t worthless for everyone, but it’s oversold, over-promised, and over-utilized by landlords who would be better served by proper insurance and good management practices. The people selling you LLCs rarely run the actual cost-benefit analysis, because if they did, most of their clients would buy umbrella policies instead.