LLC or Corporation? How to choose the right structure for your Oregon business.

Start with what you are protecting

A client comes to Paluska Law after inheriting ten single family rental properties, purchased by their parents over a lifetime. The client wants to know how to protect what they just inherited. The conversation does not start with entity types. It starts with a question: if those ten properties are deeded to you personally and a lawsuit arises at one of them, what can that lawsuit reach?

The answer is uncomfortable. Owned personally, the properties are not separated from each other or from anything else the client owns. A serious claim arising at one rental can reach the other nine, and potentially also the client’s personal assets. Two tools address that risk, and they work together: a limited liability company, and insurance.

The giant piggy bank

Oregon law is direct about what an LLC does. Under ORS 63.165, the debts and liabilities of a limited liability company are solely the company’s, and a member is not personally liable for them merely for being a member. Move the ten rentals into an LLC, and a claim arising at one of the properties is now a claim against the company, not against the client’s home, savings, and everything else they own. That is a good start.

It is only a start, because an LLC works like a giant piggy bank. Everything you put inside it is at risk together. Ten properties in one LLC means a serious claim at one property puts the other nine on the table, because they are all assets of the same company. Put each property in its own limited liability company, and there is no piggy bank. The liability that arises at one property stays at that property, walled off from the other nine.

“But I don’t want ten bank accounts”

This is the moment in the meeting when clients push back, and the objections are practical ones. Ten LLCs sounds like ten bank accounts, ten insurance policies, and ten tax returns. Then come the questions that matter even more: how does this work with my spouse, what happens if one of us dies, what happens if we divorce, and how do we make sure these properties eventually go to our kids?

There is no single answer, and that is the point. There are many ways to structure ownership among the entities, and the right one depends on the client’s family, their tolerance for risk and administration, the value of each property, and where they want the assets to end up. This is where more than thirty years of walking Oregon families through these decisions earns its keep, and where questions that reach into personal estate planning bring the client’s other advisors into the plan. Inheriting ten rental properties should be a wonderful thing. The parents spent a lifetime building it to pass on, and the planning exists so the client can protect it and grow it.

Insurance is the other half

The entity structure is one tool; insurance is the other, and the planning treats them together. Each property needs two kinds of protection: liability coverage for claims that arise at the property, and coverage for the property itself, which agents variously call property coverage, fire coverage, or casualty coverage. Both need to match how the property is actually used and what it is actually worth. The structure conversation ends with a practical list of what to ask the insurance agent, because a well-built set of LLCs holding underinsured properties is only half a plan. As the client’s insurance questions get answered, the entity plan and the coverage start working as one system, which is the outcome the whole exercise is for.

When the business and the land are not the same asset

The second version of this conversation happens with farmers and with clients buying a business that comes with real property: a restaurant, a nursery, a farm. The instinct is to buy it all as one thing, because it was sold as one thing. It usually should not be owned as one thing, and the reason is the same piggy bank problem in a different costume. The real property is often the most valuable asset in the deal, worth more than the business operating on it. Put the land and the business in one entity, and a claim arising from the business operations puts the real property on the table with it.

The structure depends on the property. A single family rental owned by an LLC is leased directly to the renter; there is no separate operating business, so one entity does the job. A commercial property is different. Take a nursery: one LLC owns the real property and the greenhouses, and it leases them to the nursery business itself, typically an S corporation or a second LLC. Which one is a decision made with the client and the client’s Certified Public Accountant, because the choice turns on the client’s particular business and taxes. The result is that the operating business can take a hit without putting the land under it at risk.

What an online formation website cannot do

Every part of this article describes a conversation, not a form. An online formation website can file Articles of Organization. It cannot sit across the desk, ask what you just inherited or what you are about to buy, explain how the piggy bank works, walk through what happens on a death or a divorce, coordinate with your Certified Public Accountant and your insurance agent, and then build the structure that fits your family and your assets. That planning meeting, and the implementation that follows it, is the actual product. The formation work itself moves quickly; a new Oregon entity is typically formed within about a week once the decisions are made.

If you have inherited property, are buying a business that includes real estate, or are holding rentals in your own name today, the structure conversation is worth having before a claim decides the question for you.

Michael Paluska has formed Oregon LLCs and corporations for closely held businesses, real estate investors, and families for more than thirty years. To talk through the right structure for what you own, schedule a consultation or read more about the firm’s Business Formation practice.

Common questions about choosing an Oregon business structure

Is an LLC or a corporation better for an Oregon small business?

Neither is better in the abstract. The right answer depends on how the business earns money, how many owners it has, how profit will be taken out, and what your CPA advises on the tax side. Every formation at Paluska Law opens with a planning meeting with you, Michael, and your CPA.

Can I change from an LLC to a corporation later?

You can, though it can be expensive, in legal fees, in accounting fees, and potentially in additional taxes paid and write-offs never realized. Taking the time upfront to do the proper planning, with your attorney and your accountant, before you form the company, saves both time and money.

Does an Oregon LLC protect my personal assets?

An Oregon LLC separates the company’s liabilities from your personal assets when the company is both formed correctly and maintained correctly. That protection depends on keeping the entity’s records current, keeping company money separate from personal money, signing contracts in the company’s name rather than your own, and complying with the company’s other compliance requirements.

Do I need a separate LLC for each property I own?

Often, yes. Holding each property in its own limited liability company separates the liability of one property from the others and from the business conducted on that property. The right number depends on numerous factors, including the value, financing, insurance, and the client’s risk tolerance.

Who files the S corporation election?

Our office recommends that your accountant file IRS Form 2553 to obtain the S election. The election is a tax filing that follows the choice of entity made during the initial meeting Paluska Law holds with the client and the client’s accountant.

What does an online formation service miss?

A filing service produces forms. It does not decide whether an LLC or a corporation fits your business and tax situation, draft an Operating Agreement or Bylaws around how your company actually operates, or coordinate with your CPA and insurance agent before the entity is formed.