Once you start generating rental income or acquiring multiple properties, the question inevitably comes up:
Should I hold my properties in an LLC—or elect S-Corp status for tax savings?
Both structures offer benefits. But they serve very different purposes in a real estate business—and choosing the wrong one could cost you in taxes, liability exposure, or financing flexibility.
In this guide, we’ll break down the differences between LLCs and S-Corps, when each makes sense, and how to structure your rental portfolio for long-term protection and profitability.
What Is an LLC?
An LLC (Limited Liability Company) is the most common legal entity used by real estate investors. It provides liability protection, meaning your personal assets are shielded if something goes wrong at the property.
Key benefits of an LLC:
- Limits personal liability from lawsuits or claims
- Offers pass-through taxation (profits flow to your personal return)
- Allows you to own rental property in a separate legal entity
- Works with DSCR loans and entity-based financing
- Easy to set up and maintain
LLCs are ideal for buy-and-hold rental investors who want legal protection, portfolio scalability, and tax simplicity.
What Is an S-Corp?
An S-Corporation is not a type of entity—but rather a tax election you can make with the IRS (typically applied to an LLC or a corporation). The main reason investors consider an S-Corp is for self-employment tax savings.
Key features of an S-Corp:
- Allows you to split income into salary + distributions
- Avoids self-employment tax on the distribution portion
- Requires payroll setup and tax filings (more administrative work)
- Often used by active businesses, like property management or flipping
🚫 Important: S-Corps are generally not recommended for holding rental property directly because rental income is considered passive and not subject to self-employment tax anyway.
LLC vs S-Corp: Side-by-Side Comparison
| Feature | LLC | S-Corp (as LLC election) |
| Liability Protection | ✅ Yes | ✅ Yes (if LLC or Corp base) |
| Used for Rentals? | ✅ Common | 🚫 Not ideal for passive rentals |
| Tax Savings | Basic pass-through | Advanced—on active income only |
| Self-Employment Tax | Not applicable to rental income | Savings only apply to active biz |
| Works with DSCR Loans | ✅ Yes | 🚫 Often restricted |
| Annual Requirements | Minimal | More complex (payroll + filings) |
| Best For | Buy-and-hold investors | Active operators (flippers, PMs) |
When to Use an LLC for Rentals
You should strongly consider using an LLC if you:
- Own one or more rental properties
- Want liability protection for lawsuits or tenant issues
- Need to finance with DSCR loans or entity-based loans
- Want to keep your rental operations separate from your personal finances
- Plan to grow your portfolio and eventually establish multiple entities
Most long-term investors start with a single-member LLC, then expand into series LLCs or holding companies as they scale.
When (and When Not) to Consider an S-Corp
An S-Corp can make sense if you:
- Operate an active real estate business (e.g., wholesaling, flipping, management)
- Earn over $75K/year in net active income
- Want to minimize self-employment tax on profits
Do not elect S-Corp status for a holding company that owns rental real estate. You could:
- Trigger tax issues when transferring properties in/out of the entity
- Limit your ability to use depreciation and passive loss deductions
- Complicate your exit or estate planning strategy
Can You Use Both?
Yes—and many professional investors do.
- Hold rental properties in an LLC (for liability and financing)
- Run active businesses like flipping or management in an S-Corp (for tax savings)
- Pay yourself from the S-Corp and keep rentals separate to maximize depreciation and minimize audit risk
Example structure:
• Rentals → Owned in LLC (passive income, DSCR-friendly)
• Property management → Run through S-Corp (active income, payroll)
• Flips or construction → Held in separate S-Corp or C-Corp
Financing Considerations
Lenders typically prefer rental properties to be held in an LLC, LP, or individual name—not S-Corps.
Most DSCR loan programs:
- ✅ Allow LLC ownership
- 🚫 Do not allow S-Corp-owned assets
- ✅ Can close under your entity name with a personal guarantee
- ✅ Accept pass-through income for DSCR qualification
Final Thoughts
For real estate investors, LLCs are the gold standard for holding rentals. They provide the legal protection and financing flexibility you need to scale, while keeping taxes simple.
S-Corps are best reserved for active income operations—like flipping, managing properties, or running a real estate agency—not for passive rental income.
Talk to a qualified CPA or legal advisor before making structural changes—but if you’re just getting started, an LLC is almost always the right first step.
Our advise is based on experience in the mortgage industry and we are dedicated to helping you achieve your goal of owning a home. We may receive compensation from partner banks when you view mortgage rates listed on our website.
