LLC, S-Corp, or Sole Proprietor: Choosing the Right Structure for Your Rental Portfolio

The Structure Question Nobody Answers Clearly 

You own five rental properties. You've been filing everything on Schedule E as a sole proprietor. Your buddy at the real estate meetup says you need an LLC. Your CPA mentioned an S-Corp might save on self-employment taxes. A Facebook group insists you need a separate LLC for every property. 

Everyone has an opinion. Nobody shows you the actual math. 

The right business structure for your rental portfolio depends on three factors: liability protection, tax efficiency, and operational complexity. And the answer changes as your portfolio grows. 

Sole Proprietorship: The Default 

If you own rental property in your personal name and haven't formed a business entity, you're a sole proprietor. This is how most individual landlords start, and for small portfolios (one to three properties), it's often fine. 

• ‍Advantages: zero setup cost, no annual filing requirements beyond your personal tax return, no separate bank accounts required (though they're recommended), and complete simplicity. 
• ‍Disadvantages: zero liability protection. If a tenant slips on your property and sues, they can come after your personal assets — your home, your savings, your car. Your landlord insurance provides some protection, but if a judgment exceeds your policy limits, you're personally exposed. 

For a portfolio of five or more properties, the liability exposure alone usually justifies structuring.

Single-Member LLC: The Standard Choice 

A single-member LLC (or a multi-member LLC if you co-own properties) creates a legal barrier between your rental business and your personal assets. This is the most common structure for individual landlords, and for good reason. 

Liability protection

‍If properly maintained, the LLC shields your personal assets from claims arising from your rental business. A tenant's lawsuit targets the LLC's assets, not yours. 

Tax simplicity

‍A single-member LLC is a "disregarded entity" for tax purposes. Income and expenses still flow through to your personal tax return on Schedule E, exactly as they would without the LLC. No separate tax return required. 

Setup and maintenance

‍Formation costs range from $50 to $500 depending on the state. Annual fees range from $0 (in some states) to $800 (California's notorious franchise tax). You'll need a separate bank account, an EIN from the IRS, and you should maintain a basic operating agreement even as a single member entity. 

The California problem

‍If your properties are in California, the LLC will cost at least $800 per year in franchise tax, regardless of income. For a single property with thin margins, this cost may not justify the structure. For a multi-property portfolio, the $800 is negligible relative to the protection. 

One LLC per Property vs. One LLC for Everything 

The "one LLC per property" advice sounds appealing: if something goes wrong at one property, only that LLC's assets are at risk, not your entire portfolio. 

In practice, this creates significant operational complexity. Every LLC needs its own bank account, its own EIN, its own annual filing, and its own bookkeeping. For a 15-property portfolio, that's 15 bank accounts, 15 annual reports, and 15 sets of books to maintain. 

A more practical approach for most individual landlords: one LLC for the entire portfolio, backed by adequate insurance. An umbrella policy of $1-2 million provides an additional layer of protection that, combined with the LLC structure, gives you meaningful liability shielding without the administrative nightmare of multiple entities. 

Some landlords with larger portfolios or higher-value properties use a series LLC structure (available in some states) that allows multiple "series" within a single parent LLC, each with its own assets and liabilities. This offers the isolation benefits of multiple LLCs with significantly less administrative burden. 

S-Corp Election: When It Makes Sense 

An LLC can elect to be taxed as an S-Corporation. This election can save money on self-employment taxes — but it's relevant primarily for active business income, not passive rental income. 

Here's the distinction: rental income from a standard landlord is generally classified as passive income, which isn't subject to self-employment tax regardless of your business structure. In this scenario, an S Corp election provides no self-employment tax savings because you weren't paying self-employment tax in the first place.

An S-Corp election might make sense if: you're providing substantial services beyond standard rental activities (furnished short-term rentals, for example), your rental activities have been classified as active trade or business income, or you have significant non-rental business income flowing through the same entity. 

For most individual landlords with standard long-term rentals, the S-Corp election adds complexity (mandatory reasonable salary, payroll tax filings, potential state-level taxes) without meaningful tax benefit. Discuss with your CPA before making this election. 

When to Restructure 

If you started as a sole proprietor and are growing your portfolio, the right time to restructure is before something goes wrong, not after. 

The common trigger points: you acquire your fourth or fifth property (the portfolio is now large enough that a single lawsuit could be devastating), you have significant personal assets to protect (home equity, retirement accounts, other investments), or you plan to bring on partners or investors (an LLC provides a clean framework for shared ownership). 

Transferring properties into an LLC after purchase involves recording new deeds, potentially notifying lenders (due-on-sale clause considerations), and updating insurance policies. In most cases, transferring a property from personal ownership to a single-member LLC doesn't trigger the due-on-sale clause, but some lenders interpret it differently. Consult with your attorney before making the transfer.