LLC vs sole proprietor for STR: which structure is best?

Category: Legal & Regulations

By: James Wu

Posted: 2026-01-27T16:46:10.950Z

I currently run my STR as a sole proprietor (no formal business entity). My CPA suggested forming an LLC for liability protection, but a real estate attorney friend said it's unnecessary if I have good insurance. Who's right? And if I do form an LLC, should it be in my home state or the state where the property is?

Reply by Brittany Simmons:

This is one of the most debated topics in STR hosting. Here's the practical breakdown: **Sole Proprietor (no entity):** - Simplest setup — no formation costs, no annual fees - All income/expenses on Schedule E of your personal tax return - ZERO liability protection — if a guest sues you, your personal assets (home, savings, car) are at risk - Fine if you have ONE property and excellent insurance coverage **Single-Member LLC:** - $50-500 to form (varies by state) - $0-800/year in annual fees (California is $800/yr, many states are free) - Liability protection — separates your personal assets from the business - Same tax treatment as sole proprietor (pass-through) unless you elect S-Corp - Recommended for MOST STR hosts **When LLC becomes essential:** - You have 2+ properties - Your property is high-value ($500K+) - You're in a litigious market - You have significant personal assets to protect - You plan to bring on investors or partners **State of formation:** Form the LLC in the state where the property is located. If your property is in Florida and you live in Texas, form the LLC in Florida. Forming in Delaware or Wyoming for "tax advantages" is usually unnecessary for small STR operators and adds the cost of foreign registration in the property state anyway. **My setup:** One LLC per property (for 3+ properties), each with its own bank account and insurance. Yes, it's more bookkeeping, but if a lawsuit from Property A can't reach Properties B and C, that's worth the overhead. Pair your LLC with dedicated STR insurance from Safely (https://safely.com) or Steadily (https://steadily.com) for comprehensive protection.

Reply by Michael Thompson:

Important caveat: an LLC only protects you if you treat it like a real business. That means: - Separate bank account for the LLC (NEVER co-mingle personal and business funds) - Operating agreement on file - Annual filings kept current - Use the LLC name on all contracts, leases, and vendor agreements If you co-mingle funds or ignore formalities, a court can "pierce the corporate veil" and your personal assets are exposed anyway. The LLC is only as strong as your discipline in maintaining it.