Entity Structuring for Commercial Real Estate

Why Does Entity Structuring Matter for Commercial Real Estate Investors?

Entity structuring is one of the most consequential decisions a commercial real estate investor will make. The legal entity you choose determines your personal liability exposure, your tax burden, your ability to secure financing, and your flexibility when scaling a portfolio. Getting it wrong can cost hundreds of thousands of dollars in unnecessary taxes, expose personal assets to lawsuits, or disqualify you from favorable loan terms.

Commercial real estate is inherently capital intensive. A single property can carry millions in debt, dozens of tenants, and complex operating agreements. Without the right entity structure, investors leave themselves vulnerable to creditor claims, partnership disputes, and IRS scrutiny.

This guide breaks down every major entity type used in CRE investing, compares their strengths and weaknesses, and explains exactly when each structure makes sense for your investment strategy.

What Are the Most Common Entity Types for CRE Investments?

Commercial real estate investors typically choose from six primary entity structures. Each offers a different balance of liability protection, tax treatment, management flexibility, and financing compatibility.

Limited Liability Company (LLC) is the most popular structure for CRE investors. An LLC provides pass-through taxation, meaning profits and losses flow directly to members' personal tax returns without entity-level taxation. Members enjoy limited liability protection, shielding personal assets from claims against the property. LLCs also offer flexible management structures and minimal compliance requirements compared to corporations.

Limited Partnership (LP) separates investors into general partners (GPs) and limited partners (LPs). GPs manage operations and assume unlimited liability, while LPs contribute capital and enjoy liability protection proportional to their investment. LPs are the dominant structure for real estate syndications and joint ventures involving passive investors.

S-Corporation provides pass-through taxation with the added benefit of potentially reducing self-employment taxes on distributions. However, S-Corps carry restrictions that limit their usefulness in CRE, including a 100-shareholder maximum, single class of stock requirement, and prohibition on foreign ownership.

C-Corporation faces double taxation, where profits are taxed at the corporate level and again when distributed as dividends. Despite this disadvantage, C-Corps can be useful for investors who plan to retain significant earnings for reinvestment, as the flat 21% corporate tax rate may be lower than individual rates.

Series LLC is available in roughly 20 states and allows a single LLC to create multiple "series," each with its own assets, liabilities, and members. This structure lets investors isolate properties within separate series without forming entirely new entities for each acquisition.

Single-Purpose Entity (SPE) is a standalone LLC or corporation created to hold one specific property. Most commercial lenders require SPEs for loans above $5 million to ensure the borrowing entity has no other liabilities that could complicate foreclosure proceedings.

How Do Entity Structures Compare on Liability Protection?

Liability protection is the primary reason investors use entities rather than holding property in their personal names. However, not all structures offer the same degree of protection.

An LLC provides a liability shield between the property and the member's personal assets. If a tenant sues the LLC for an injury on the property, the member's home, personal bank accounts, and other investments are generally protected. This protection holds as long as the member maintains the LLC properly by keeping finances separate, maintaining adequate insurance, and avoiding commingling funds.

A Limited Partnership protects limited partners but leaves general partners fully exposed. This is why most GP positions are held by an LLC rather than an individual, creating a layered protection strategy.

Series LLCs offer internal liability barriers between each series. If Series A owns an apartment building that generates a lawsuit, the assets in Series B and Series C should remain protected. However, courts have not uniformly tested this structure, and some lenders refuse to work with series LLCs due to uncertainty about how courts in non-series-LLC states will treat them.

Single-purpose entities provide the strongest isolation because each property sits in its own legal entity with no connection to other assets. This is the gold standard for commercial lenders and sophisticated investors managing portfolios above $10 million.

What Are the Tax Implications of Each Entity Structure?

Tax treatment varies dramatically between entity types and directly impacts your net returns on CRE investments. Understanding these differences is essential before selecting a structure.

Pass-through entities (LLCs, LPs, S-Corps) do not pay entity-level federal income tax. Instead, all income, losses, deductions, and credits pass through to the owners' individual tax returns. This is particularly valuable in commercial real estate because investors can use depreciation, cost segregation, and interest deductions to offset taxable income. If you are planning a 1031 exchange, pass-through entities preserve your ability to defer capital gains when disposing of properties.

C-Corporations pay a flat 21% federal corporate tax rate on net income. Distributions to shareholders are then taxed again as qualified dividends at 0%, 15%, or 20% depending on the shareholder's income level. This double taxation typically makes C-Corps unsuitable for income-producing CRE unless the investor plans to retain all earnings within the entity.

S-Corporations can reduce self-employment tax exposure. Members who actively manage properties can pay themselves a reasonable salary (subject to payroll taxes) and take remaining profits as distributions (not subject to self-employment tax). However, the IRS scrutinizes S-Corp salary levels closely.

For investors pursuing aggressive tax deduction strategies, pass-through structures paired with cost segregation studies can generate substantial paper losses in the early years of ownership, offsetting income from other properties or even W-2 income for qualifying real estate professionals.

When Should You Use a Holding Company Structure?

A holding company structure places a parent LLC or LP at the top of a hierarchy, with individual property-level LLCs beneath it. This tiered approach is the preferred structure for investors with three or more properties and is standard practice among institutional CRE firms.

The parent entity (often called a "management company" or "holding company") typically provides centralized management, branding, and administrative services. Each subsidiary LLC holds a single property, creating asset isolation while maintaining operational efficiency.

Benefits of a holding company structure include:

Centralized banking and accounting through the parent entity simplify bookkeeping. Each property LLC maintains its own bank account, but the parent entity can manage distributions, capital calls, and expense reimbursements from a single control point.

Lender relationships become easier to manage when a single parent entity serves as the guarantor or key principal across multiple loans. Lenders evaluating your permanent loan or acquisition financing application will appreciate a clean organizational chart showing professional-grade structuring.

Estate planning and succession become more straightforward when ownership interests in a single parent entity can be transferred rather than interests in dozens of individual property LLCs.

How Do Lenders Evaluate Your Entity Structure?

Commercial lenders pay close attention to entity structure during underwriting. The wrong structure can delay or derail your financing. Understanding lender expectations helps you avoid costly restructuring later.

SPE requirements are nearly universal for CMBS loans, life company loans, and agency loans above certain thresholds. An SPE must typically meet these criteria: the entity owns no assets other than the subject property, has no liabilities unrelated to the property, does not commingle funds with other entities, maintains separate books and records, and has an independent director or manager who must approve any bankruptcy filing.

Recourse considerations also connect to entity structure. When applying for a bridge loan or mezzanine financing, lenders evaluate the guarantor's net worth and liquidity. A clean entity structure that clearly separates the borrowing entity from the guarantor's other assets makes this evaluation straightforward.

Operating agreements matter to lenders as much as the entity type itself. Lenders review operating agreements for provisions about member disputes, transfer restrictions, dissolution triggers, and management authority. A poorly drafted operating agreement can trigger a loan denial regardless of the entity type you choose.

Use our DSCR calculator to evaluate how your property's cash flow aligns with lender requirements before committing to a specific structure.

What Is the Best Entity Structure for Different Investment Strategies?

The right entity structure depends on your investment strategy, portfolio size, investor composition, and growth plans. There is no single correct answer, but there are clear best practices for each scenario.

Buy-and-hold single property investors should use a standalone LLC taxed as a disregarded entity (single member) or partnership (multiple members). This provides liability protection with minimal administrative overhead. Formation costs range from $100 to $500 in most states, and annual compliance typically requires only a registered agent and annual report filing.

Syndication sponsors should use an LP or LLC with a GP/LP or Manager/Member structure. The GP or Manager entity should be a separate LLC owned by the sponsor. This layered approach protects both the sponsor and passive investors while providing the flexibility to allocate profits, losses, and fees according to a waterfall distribution structure.

Portfolio investors with 5+ properties should implement a holding company structure with property-level SPEs. The parent entity handles management and administration while each property LLC isolates risk. This structure scales efficiently because adding a new property simply requires forming a new subsidiary LLC.

Developers and value-add investors often need project-specific entities that accommodate construction financing, equity partners, and eventual disposition. A project-level LLC with clearly defined capital contribution schedules, profit splits, and exit provisions is standard.

How Much Does Entity Structuring Cost and What Are the Ongoing Requirements?

Cost is a legitimate concern, especially for newer investors. Entity formation and maintenance expenses vary significantly by state and structure complexity.

Formation costs include state filing fees (typically $50 to $500), registered agent fees ($100 to $300 annually), and attorney fees for drafting operating agreements ($1,500 to $5,000 for a standard LLC, $5,000 to $15,000 for complex multi-entity structures with detailed waterfall provisions).

Ongoing compliance costs include annual report filings ($0 to $800 depending on the state), franchise taxes (California charges a minimum $800 annually per LLC), separate tax return preparation ($500 to $2,000 per entity), and registered agent renewals.

State selection matters because formation and maintenance costs vary dramatically. Delaware, Wyoming, and Nevada are popular choices for CRE entities due to favorable LLC statutes, low fees, and strong case law protecting members. However, you will still need to register as a foreign entity in any state where you own property, which adds another layer of cost.

For a portfolio of 10 properties using a holding company structure with 10 property-level LLCs and one parent LLC, expect annual compliance costs of $8,000 to $25,000 depending on the states involved and the complexity of your tax situation.

What Steps Should You Follow to Set Up Your Entity Structure?

Setting up your entity structure correctly from the start prevents expensive restructuring later. Follow this process to ensure your structure aligns with your investment goals and lender requirements.

First, define your investment strategy and timeline. Are you buying a single property or building a portfolio? Will you have partners or outside investors? Are you pursuing value-add projects or stabilized cash-flow assets? These answers determine which entity type fits best.

Second, consult a CRE attorney and tax advisor simultaneously. Entity structuring sits at the intersection of real estate law, tax law, and finance. An attorney who understands commercial lending requirements can draft operating agreements that satisfy both your business needs and your lender's underwriting standards.

Third, form the entity in the appropriate state and obtain an EIN from the IRS. Open a dedicated bank account for the entity and never commingle personal and entity funds.

Fourth, draft or review the operating agreement with specific attention to management authority, capital contribution obligations, distribution provisions, transfer restrictions, and dissolution procedures.

Fifth, coordinate with your lender early in the process. If you are pursuing permanent financing or acquisition loans, share your proposed entity structure with your lender before finalizing formation. Lenders may require specific provisions in your operating agreement or mandate an SPE structure.

Ready to discuss how your entity structure affects your financing options? Contact Clearhouse Lending to speak with a commercial lending specialist who can help you align your legal structure with the right loan program.

What Are the Most Common Entity Structuring Mistakes to Avoid?

Even experienced investors make entity structuring mistakes that create unnecessary risk or cost. Avoid these common pitfalls.

Commingling funds is the fastest way to lose liability protection. Every entity must have its own bank account, and personal expenses should never be paid from entity accounts. Courts can "pierce the corporate veil" and hold members personally liable if they find commingling.

Using a single entity for multiple properties exposes your entire portfolio to a claim against any single property. A lawsuit from a slip-and-fall at one property could put a lien on every asset the entity owns.

Ignoring state-specific requirements creates compliance gaps. If you form a Wyoming LLC but own property in Texas, you must register as a foreign LLC in Texas and comply with Texas reporting requirements.

Failing to update structures as your portfolio grows leaves you operating with an entity framework designed for a smaller, simpler operation. Review your entity structure annually and restructure proactively as you add properties, partners, or debt.

Choosing the cheapest option without considering long-term costs often backfires. A $200 online LLC formation might save money upfront but cost thousands in restructuring fees when your lender requires a properly drafted SPE with specific operating agreement provisions.

Frequently Asked Questions About Entity Structuring for CRE?

Do I need a separate LLC for each commercial property? For properties under $1 million with no outside investors, a single LLC can work initially. For properties above $1 million or any property with commercial debt, a separate LLC (or SPE) per property is strongly recommended. Most commercial lenders require this structure for loans above $5 million.

Can I transfer an existing property into a new LLC? Yes, but the transfer may trigger a due-on-sale clause in your mortgage, reassessment of property taxes in some states, and potential transfer tax liability. Always consult your lender and attorney before transferring property into a new entity.

What is the difference between a Series LLC and separate LLCs? A Series LLC creates internal divisions within one legal entity, while separate LLCs are independent legal entities. Series LLCs cost less to form and maintain but face uncertainty in states that do not recognize the series structure. Many commercial lenders will not accept Series LLC borrowers.

Should I form my LLC in Delaware or the state where my property is located? If you own property in one state, forming your LLC in that state is usually simpler and cheaper. Delaware offers advantages for multi-state portfolios, complex partnership structures, or entities that may face litigation. However, you will always need to register as a foreign entity in the property's state regardless of where you form the LLC.

How does entity structure affect my ability to get a commercial loan? Lenders evaluate entity structure during underwriting. A clean, properly documented entity structure with appropriate SPE provisions signals professionalism and reduces lender risk. Poor structuring, missing operating agreements, or commingled finances can result in loan denial or less favorable terms. Contact Clearhouse Lending to discuss how your structure aligns with available loan programs.

Can I use an S-Corp for commercial real estate investing? You can, but S-Corps carry restrictions that make them less flexible than LLCs for CRE. The 100-shareholder limit, single class of stock requirement, and prohibition on certain ownership types (foreign investors, other entities as shareholders) limit scalability. Most CRE attorneys recommend LLCs or LPs instead.

When should I hire a CRE attorney versus using an online formation service? Use online formation services only for the simplest situations, such as a single-member LLC holding one small property with no debt. For any investment involving partners, commercial financing, syndication, or properties above $1 million, hire a CRE attorney who understands both real estate law and commercial lending requirements.

How often should I review my entity structure? Review your entity structure annually and whenever you acquire a new property, add a partner, refinance existing debt, or experience a significant change in tax law. The Tax Cuts and Jobs Act of 2017 changed the calculus for many entity structure decisions, and future tax legislation could do the same.

Sources?

1. Internal Revenue Service. "Limited Liability Company (LLC)." IRS.gov, Publication 3402, 2024.
2. Uniform Law Commission. "Uniform Limited Liability Company Act." Revised 2013, with amendments through 2023.
3. American Bar Association. "Real Estate Finance Opinion Report." ABA Section of Real Property, Trust and Estate Law, 2024.
4. National Conference of State Legislatures. "Series LLCs: State Legislation Summary." NCSL.org, updated 2024.

Ready to align your entity structure with the right commercial loan? Our team at Clearhouse Lending specializes in matching borrowers with programs that fit their legal and financial framework. Reach out today to get started.