If you own a rental house in Lakewood or are about to buy a small apartment building in Parma, someone has probably told you to “put it in an LLC.” It is common advice, and often good advice, but an LLC is not a magic shield, and moving property into one involves real steps with real consequences. Here is a plain-English look at why Ohio investors hold property in LLCs, how it works, and the issues worth sorting out before you sign a deed.
Why investors use an LLC for real estate
A limited liability company is a separate legal entity. In Ohio, LLCs are governed by Chapter 1706 of the Ohio Revised Code. When an LLC owns a property, the LLC, not you personally, is the owner, the landlord and the party to the leases and contracts. Investors usually point to three benefits:
- Liability separation. If a tenant or visitor is hurt at the property and sues, the claim is generally against the LLC and its assets. Your home, savings and other properties are typically not on the line for the LLC’s obligations, as long as the company is set up and run properly.
- Protection from your personal creditors. Ohio law limits what a member’s personal judgment creditor can do to an LLC interest. Under R.C. 1706.342, a court may grant a charging order, which lets the creditor receive distributions the member would otherwise get, and the statute makes that the exclusive remedy for collecting against the membership interest. The creditor generally cannot take over the property or the company.
- Organization. An LLC gives you a clean way to keep each property’s income, expenses and bank account separate, bring in partners on clear terms, and plan for what happens to the property if you die or want to step back.
Many investors with several properties use more than one LLC so a problem at one building doesn’t put the others at risk. Whether that makes sense depends on the number and value of the properties and the cost of running each entity.
Buying new property in an LLC vs. transferring property you already own
Buying in the LLC’s name from the start
The simplest path is to form the LLC first, then sign the purchase contract and take title in the LLC’s name. That means filing Articles of Organization with the Ohio Secretary of State, getting an EIN from the IRS, opening a bank account in the company’s name and signing an operating agreement before you go under contract. If you have already signed a contract in your own name, check whether it allows you to assign it to your LLC; many do, but some require the seller’s consent.
Moving property you already own
Transferring a property you already hold into an LLC usually means signing and recording a new deed from you to the company. It sounds routine, but three issues come up again and again: your mortgage, your title insurance and the county’s conveyance fee.
The mortgage: due-on-sale clauses
Most residential mortgages have a due-on-sale clause, which lets the lender demand full payment if you transfer the property without its consent. A federal law, the Garn-St Germain Act (12 U.S.C. 1701j-3), stops lenders from enforcing these clauses for certain transfers, such as some transfers to a spouse or to a living trust where the borrower remains a beneficiary. A transfer to an LLC is not on that list.
In practice, some lenders never act on a transfer to the borrower’s own LLC, but that is the lender’s choice, not a right you have. Before you deed a mortgaged property to an LLC, read the mortgage, consider asking the lender for written consent, and weigh whether refinancing into a loan made to the LLC is the better route. Keep in mind that lenders making loans to LLCs commonly ask the owners to sign personal guarantees, which means you may still be personally responsible for that debt.
Title insurance after the transfer
Your owner’s title insurance policy protects the insured owner named in it. When you deed the property to a new entity, coverage may not automatically follow it to the LLC, depending on the policy’s terms. Before transferring, review the policy or ask your title company whether coverage continues and whether an endorsement or new policy is available for the LLC. It is much easier to sort this out before a title problem appears than after.
The county conveyance fee
Ohio counties collect a real property conveyance fee when a deed is recorded, and certain transfers can be exempt. Exemptions are claimed on Ohio form DTE 100EX, filed with the county auditor. Auditors in some counties have started asking for more documentation when property moves into or out of an LLC, so expect to explain the transaction and back up any exemption you claim.
Keeping the liability protection intact
An LLC protects you only if it is treated as a real, separate business. In unusual cases, Ohio courts can “pierce the veil” and hold owners personally liable, typically where the company was so controlled and misused that it had no separate existence and was used to commit a fraud or wrong. You don’t want to give anyone that argument. Good habits include:
- Signing leases, contracts and notices in the LLC’s name, with your title (for example, “Member”).
- Using a separate bank account for each LLC and never paying personal expenses from it.
- Keeping the LLC adequately funded to cover normal repairs and obligations.
- Having a written operating agreement that fits how the company actually runs.
- Keeping records of major decisions and contributions, even in a single-member LLC.
- Making sure the deed, insurance policy, utility accounts and rental license (if your city requires one) all match the LLC’s name.
Also remember what an LLC does not do. If you personally cause harm, for example by doing negligent repair work yourself, you can be personally liable no matter who owns the building. That is why an LLC works alongside good insurance, not instead of it. Make sure the liability policy names the LLC as the insured and that the coverage amounts fit the property.
Taxes and costs to discuss with your adviser
A single-member LLC is usually disregarded for federal income tax purposes, so the rental income and expenses still appear on your personal return. A multi-member LLC is typically taxed as a partnership by default and files its own return. Either way, the LLC itself usually doesn’t change how much income tax you owe, and there are ongoing costs: formation, separate bookkeeping, possibly additional tax returns, and sometimes higher loan or insurance costs. Talk with your CPA about how an LLC fits your overall tax picture, especially if you are also planning a 1031 exchange or a sale.
Getting started
- List the properties you own or plan to buy, how each is titled and whether each has a mortgage.
- Decide whether one LLC or several makes sense, and who the members will be.
- Form the LLC, get an EIN, open a bank account and sign an operating agreement before closing or transferring.
- For existing properties, review the mortgage, the title policy and the conveyance fee rules before recording a new deed.
- Update insurance, leases, tenant notices and accounts so everything matches the LLC.
- Coordinate with your estate plan so your LLC interests pass the way you intend.
Vincent Esquire helps Ohio property owners and investors structure real estate holdings, prepare deeds and operating agreements, and handle purchases and closings. Learn more about our real estate law services or reach out to talk through your situation.
This article is for general informational purposes only and is not legal advice. Reading it does not create an attorney-client relationship. Laws change and every situation is different, so consult an attorney about your specific circumstances. Attorney advertising.
