In general, I recommend using an LLC in Ohio to invest in real estate. The protections are very strong, and it's very inexpensive to establish and maintain. The two main reasons why you might avoid it are taxation issues in your home state, or issues related to financing. Absent those concerns, I'd recommend using the LLC in Ohio.
The protections offered by the Ohio LLC are very strong. The "corporate veil" provided by LLCs and other corporate entities is one of the most important aspects of using a corporate entity. The corporate veil acts as a firewall between the business's liabilities and the personal assets of the owner(s). The protections provided by the corporate veil are extremely difficult to pierce under Ohio law. I defended a lawsuit at trial where the plaintiff attempted to sue my client's company and also actually attempted to pierce the corporate veil of the LLC in order to come after the owner's personal assets. This was the most significant aspect of the case, as the company was insolvent and out of business and could never pay any judgment rendered against it. But the owner had significant assets that would be subject to execution if the corporate veil were to be pierced. We lost badly at trial on all the other counts, and the plaintiff received a substantial judgment against my client's LLC. However, we did win on the one count that actually mattered, upholding the corporate veil of my client's LLC. By prevailing on this count, my client's personal assets were protected and the plaintiff received a worthless judgment against an insolvent company that had gone out of business. The plaintiff never even made an effort to collect on the judgment.
The court refused to pierce my client's corporate veil and render judgment against the company's owner because Ohio law is well settled on this matter and it is very business friendly. The court will pierce the corporate veil under Ohio under one of two circumstances. 1) The owner uses the LLC to commit fraud. In that case, the owner will not be permitted to engage in such conduct and then hide behind the corporate veil. Or, 2) under the alter ego doctrine. If the owner so heavily co-mingles business and personal funds that it becomes difficult if not impossible to draw any distinction between the two then the corporate veil will not be upheld. So as long as you keep excellent books and business records, do not pay personal expenses from the business (or business expenses from personal accounts), and do not commit fraud, you have a very strong chance of your LLC's corporate veil successfully withstanding a legal challenge.
There are no negative income tax implications for using the LLC either. For a single member LLC, it defaults to a disregarded entity for tax purposes, meaning you report and pay any income tax on your personal returns, as if the LLC did not exist. For multiple member LLCs, the default tax status is that of a partnership, the same as it would be if you operated with business partners and no corporate entity and either with or without a formal written agreement between you. You can also make tax elections if you'd prefer to be taxed as a corporation, including making the Subchapter S election if so desired. Most buy and hold investors use the default classifications, either disregarded entity or partnership. Short term investors like rehabbers that fix and flip or wholesalers will often elect to be taxed as a corporation and further make the Subchapter S election for some income tax related benefits.
The costs are very inexpensive to establish and maintain the LLC. The filing fee to register the LLC is very reasonable, currently $99 with the State of Ohio. There’s no annual or recurring fees to the state aside from the initial filing fee. You'll also need a statutory agent physically located within Ohio. If you are not located within the state, this can be hired out for minimal annual costs, typically ~$50-100/year. The Articles of Organization are fairly simple to prepare and file, a lot of investors just file it themselves. For those that prefer to have an attorney prepare and file it, the cost is typically pretty minor. You may also need an operating agreement, which can be more time consuming and expensive for an attorney to draft. But for single member LLCs, meaning you are the sole owner of the company, I consider them to be unnecessary and not worth the cost for most investors. If you have a business partner, I do recommend using an operating agreement as it is effectively the partnership agreement between you and the other owners. However, that cost isn't a function of using the LLC, as even if you operate with business partners and without a corporate entity, a written partnership agreement is strongly recommended to clearly spell out each partner's rights, responsibilities, and share of profits, losses, and tax benefits.
In re: taxation issues, California in particular assesses a pretty heavy franchise tax to your LLCs. I believe it starts at ~$800/year. This applies to California residents that have an interest in an Ohio LLC, even if the LLC only owns / manages Ohio real estate. Even if you don't actively manage the LLC and instead hire an Ohio based PM. The logic is that you're managing the company, or the property manager, from your home in California, and that (supposedly) gives the business enough of a nexus to California that it permits California to assess the taxes. I'm not sure of any other state that has such a policy, but I'd double check with a CPA familiar with your home state's tax issues before using one just to be sure. In most such cases, I’d advise the investors subject to such taxation issues in their home state against using the LLC and instead recommend additional insurance coverage as a more cost effective asset protection tool.
The other reason why you might avoid using an Ohio LLC relates to the use of conventional bank financing on your properties. If you buy properties with conventional mortgage loans, you won't be permitted to close in the LLC, you'll have to do it in your own name. However, once you're closed in your own name, there's nothing that would stop you from having a deed prepared and recorded to transfer the property into an LLC shortly after you close. Your personal name will still show in the chain of title and you'll still be personally responsible for the loan, but you can transfer the property into the LLC.
However, doing this does technically violate the alienation clause in your loan agreement (commonly referred to as the 'due on sale' clause). Should they decide to enforce that clause, what would happen is the lender sends you a notice of default, and accelerates your loan payments so the entire remaining balance is due in full in the near future. Should you fail to repay the loan in full, the lender then has the ability to foreclose on the property and force the sale. In practice, I've never heard of this happening because if the lender initiates a foreclosure proceeding then the borrower will likely stop making payments. Even if you were to make payments, their acceptance of such payments may give rise to a defense to the foreclosure action. So to enforce this, the lender would effectively be voluntarily turning a performing note into a non-performing note where no payments are received while the foreclosure case proceeds, and further be incurring the legal fees to have an attorney bring the foreclosure suit. The end result of a successful foreclosure suit is that the property goes to sheriff auction where the minimum bid is 2/3rds of whatever value the appraiser assesses the property’s value to be. This is typically determined via a desktop or drive-by appraisal with no interior access. Since buyers at sheriff’s auction typically cannot inspect or access the property in any way prior to the auction, they rarely pay full market price to account for the risks of the unknown. Meaning there's a good chance the lender may not even be made whole from going through this process.
All this is to say that I find it pretty unlikely that a lender would actually do these things as it just makes very little sense to do them. About the only scenario where I can envision it making sense, is if the funds were loaned out at a much lower interest rate than the market currently bears, and it becomes worth it for a lender to incur these costs and risks in effort to get their money back to loan them out again at a significantly higher rate. Even then, I've never heard of this happening and I have clients that buy properties by taking over people’s existing mortgages (at low interest rates) despite the risk of triggering these actions. In practice, I'd be surprised if you ever had anything happen for doing this, and at most I'd expect to see a demand that the property is deeded back into your personal name from the LLC. But the risk does exist, so I'm bringing the details to your attention. Some investors think the risk is minimal and the LLC protections are worth it. Others think that risk is too significant to take the chance, and opt not to do so. It's a question of your personal risk tolerance balanced against the benefits of the LLC.
Keep in mind the LLC is just one asset protection tool available to you. Your primary insurance coverage is also an asset protection tool and the LLC's protections only come into play if your primary insurance is exhausted by a large liability claim. High net worth individuals and those that own several properties often use umbrella policies as secondary insurance to backstop the primary insurance coverage on each property as well.
Please keep in mind that this is broad, nonspecific advice that is meant to inform you on how these matters work in a general sense. Everyone’s personal circumstances are different and you should discuss the specifics of your scenario with a real estate attorney and tax professional prior to making any decisions or taking any action. Should you wish to consult with me on your specific situation, contact me at tim@tim-murphy.org to setup a consultation.