A separate LLC for your sober living property keeps the house on one side of a line and the day-to-day risk of running a recovery home on the other. Most operators who own their real estate end up with two companies: one that owns the property and one that operates the sober living home and pays it rent. Real estate and finance people call this a PropCo / OpCo structure.
The question usually comes up right before signing a purchase agreement or a lease, which is the right time to answer it. Vanderburgh Sober Living is not a law firm or an accounting firm, so treat what follows as the questions to bring to an attorney and a CPA in your state. The structure itself works the same way everywhere, and the sections below walk through it.
What Is a PropCo / OpCo Structure for a Sober Living Home?
A PropCo / OpCo structure divides a sober living business into two separate legal entities, usually two LLCs. The property company holds title to the house and does nothing else. The operating company runs the home and rents the house from the property company under a written lease.
| Role | Property Company (PropCo) | Operating Company (OpCo) |
|---|---|---|
| Owns | The house and land | Furniture, supplies, and the business itself |
| Signs | The mortgage, the deed, and the lease as landlord | The lease as tenant, resident agreements, and vendor contracts |
| Earns | Rent from the OpCo | Resident fees |
| Insures | The building, under a property policy | Operations, under general and professional liability policies |
| Holds | Real estate records | Certification, the house mentor arrangement, and resident records |
Other industries use the same split. An Ohio State University agricultural law bulletin on using business entities to manage farm liability risk describes farmland held in one LLC and leased to a separate operating LLC, so that the land “is not associated with the liability of the farming operation.” A recovery home has the same two parts: a valuable asset and an active business.
Should You Use a Separate LLC for Your Sober Living Property?
Usually yes, when you own the house and also run the home. In Vanderburgh Sober Living’s experience, operators typically put the property in one LLC and the operations in another, which separates the liability of running the home from the value of the real estate. If you lease the house from an outside landlord, you only need the operating LLC.
The right setup depends on your situation:
| Your Situation | Typical Structure |
|---|---|
| You lease the house from a landlord you do not control | One LLC: the operating company |
| You own the house and run the sober living home | Two LLCs: a PropCo that owns and an OpCo that operates |
| You own several houses | One LLC per property, often owned by a parent company, plus an OpCo |
| You already have a company holding other real estate | A new LLC for the sober living property rather than adding it to the existing company |
| A nonprofit will run the home on a house you own | Your LLC owns; the nonprofit leases and operates |
Why Sober Living Operators Separate Ownership From Operations
Running a recovery home is where the business’s risk sits. Residents live in the house, staff come and go, and disputes happen, including disputes over whether a resident has tenant rights. Resident tenant rights claims, injuries, and contract disputes land on the company that runs the home.
Keeping the house in a separate company brings several benefits:
- Liability separation: A claim against the operating company should not reach a house owned by a different company.
- Flexibility: You can later lease the house to another operator, sell the business without selling the property, or sell the property with the tenant in place.
- Partners and investors: An investor can own part of the real estate without owning part of the operating business, or the reverse.
- Cleaner books: Rent, mortgage interest, and depreciation stay in the property company, while resident fees and operating costs stay in the operating company.
The separation only holds if you respect it. Cornell Law School’s explainer on piercing the corporate veil notes that courts can hold owners personally liable when they abuse the company, for example by intermingling personal and business assets, or when it is undercapitalized. LLCs are treated similarly in most states. Two companies that share one bank account are one company in practice.
Talk to VSL about your structure
Call (844) 762-3747, weekdays 8a to 5p, or start with these:
Start a sober houseHow opening a home with VSL works, end to end. Explore the Mastery ProgramHands-on startup, certification, and operating support.How the Two LLCs Work Together: The Intercompany Lease
The lease between your two companies is the document that makes the structure real. It should read like a lease you would sign with a stranger, because a court, a lender, or the IRS may read it that way.
A sound intercompany lease covers five things:
- Fair market rent: Under Internal Revenue Code Section 482, the IRS can reallocate income between businesses owned or controlled by the same interests, so base the rent on what a comparable property would lease for.
- Who pays what: Decide whether taxes, insurance, and repairs sit with the tenant or the landlord. The choice between a triple-net vs. gross lease works the same way between your own companies as with an outside operator.
- Permitted use: State that the house will be used as a sober living home.
- Term and renewal: A multi-year term with renewal options supports certification and financing.
- Insurance: Require the operating company to carry liability coverage and name the property company as additional insured.
Rent between related companies also has tax effects. IRS Publication 925 explains that when you rent property to a business in which you materially participate, the net rental income is treated as nonpassive. A CPA can show you how that affects your return.
Insurance follows the same split. The U.S. Small Business Administration’s guide to business insurance separates commercial property coverage, which protects the building, from general and professional liability coverage, which protect against injury claims and errors. Sober house insurance needs coverage written for group living on the operating side and a property policy on the owning side.
Keep reading House Rules in Sober Houses The rules that keep a recovery home safe, structured, and worth living in. →When One LLC Is Enough for a Sober Living Home
Two companies are not always worth the cost. If you lease the house from an unrelated landlord, you have no real estate to protect, and a single operating LLC does the job. VSL finds that a single-member LLC is usually the simplest setup for a first home.
A second LLC also costs money every year, and the amount depends on the state:
- California: The Franchise Tax Board charges an $800 annual tax on every LLC doing business or organized in the state, even with no activity.
- Massachusetts: The annual report for an LLC carries a $500 filing fee.
- Texas: The Texas Comptroller sets a no-tax-due threshold of $2,650,000 for 2026 and 2027, but each LLC still files an annual information report.
Add a separate tax return, bank account, and bookkeeping for each company. For a single house with modest equity, some owners start with one LLC and split the property out once the home is stable and the equity is worth protecting.
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Scaling Up: One LLC per Property, a Holding Company, or a Series LLC
As operators add homes, most keep each property in its own LLC so that a problem at one house does not reach the others. A parent company can own several single-member LLCs, which keeps liability separate while keeping tax filing simpler. VSL rarely sees a multi-layered holding company pay off without complex tax needs.
How the IRS treats each company depends on how many owners it has. The IRS page on single-member limited liability companies explains that a one-member LLC is disregarded as separate from its owner for income tax unless it elects otherwise, and an LLC with two or more members is taxed as a partnership by default.
Some states allow a series LLC, one company with separate “series” that can each hold an asset. Delaware permits them under 6 Del. C. § 18-215, and the Texas Secretary of State explains the Texas version while warning that “Not all states recognize a series LLC.” Lenders and insurers can be unfamiliar with series, so separate LLCs are the more common choice for recovery housing.
Financing and Title: Moving a House Into a Property LLC
Decide on the structure before you buy, because moving a house into an LLC afterward can collide with your loan. Fannie Mae’s borrower eligibility rules limit conventional loans to natural persons, with narrow exceptions such as certain trusts, so a conventional mortgage usually sits in your personal name.
The federal Garn-St Germain Act stops lenders from calling a residential loan for certain transfers, such as a transfer into a living trust. A transfer to an LLC is not on that list. Talk to your lender before you deed a mortgaged house to a company, and check whether your state or county charges transfer tax or reassesses the property.
Many operators who buy in an LLC from the start use loans made to businesses. DSCR loans are underwritten on the property’s rental income and are commonly made to LLCs, which fits a property company that leases to an operating company.
- ✓Every document a carrier or broker asks for
- ✓Coverages a Level II home is expected to hold
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Pairing a Nonprofit Operator With a For-Profit Property Owner
A nonprofit operating company leasing from a for-profit property LLC is a common pairing, especially when the operator relies on grants. The choice of nonprofit or for-profit sober living is really a question about the operating company, since the property can sit in a for-profit LLC either way.
The pairing needs care when the same people sit on both sides. The IRS rules on intermediate sanctions impose excise taxes on excess benefit transactions between a tax-exempt organization and a disqualified person, which can include a board member’s company. According to the IRS page on intermediate sanctions excise taxes, the tax is 25% of the excess benefit, rising to an additional 200% if it is not corrected.
Protect both companies with three habits:
- Fair market rent: Document comparable rents for similar properties in the area.
- Independent approval: Have board members with no stake in the property LLC approve the lease.
- Written records: Keep the minutes, the comparables, and the signed lease together.
Where State Rules Shape Your Entity Setup
The PropCo / OpCo logic is national, and the filing details are state by state. Formation fees, annual reports, registered agent rules, and franchise taxes differ, and so do the documents a certifying body asks for.
Certification usually attaches to the operating company. NARR’s Standard 3.0 expects documentation of the legal business entity and current liability insurance, and Massachusetts law, M.G.L. c. 17, § 18A, requires documentation of lawful ownership or a lease for certification. An intercompany lease is what connects your operating company to the house on paper.
Vanderburgh Sober Living is not a law firm or a tax adviser, and this is educational information, not legal or tax advice. Entity rules, fees, and tax treatment vary by state and by your circumstances. Review your structure with an attorney and a CPA licensed in your state before you form entities or transfer property.
Frequently Asked Questions About a Separate LLC for Sober Living Property
Should I use a separate LLC for my sober living property?
Usually yes, if you own the house and also run the home. Most VSL operators hold the property in one LLC and run the home through a second, so claims from operations do not reach the real estate. If you lease the house from someone else, one operating LLC is enough.
What is a PropCo / OpCo structure?
A PropCo / OpCo structure splits one business into two companies. The property company (PropCo) owns the real estate and leases it out. The operating company (OpCo) signs the lease, runs the sober living home, holds resident agreements and insurance, and pays rent to the PropCo. Each has its own bank account and records.
How much rent should my operating LLC pay my property LLC?
Set the rent at fair market value and put it in a written lease. The IRS can reallocate income between businesses under common control when the terms do not match what unrelated parties would agree to. Many operators base the figure on local rents for a comparable property and have a CPA confirm it.
Do I need a holding company for my sober living homes?
Rarely at the start. A single-member LLC is usually the simplest setup for a first home, and VSL seldom sees a multi-layered holding company pay off without complex tax needs. As homes are added, some owners form one LLC per property with a parent company owning them. A CPA can confirm what fits.
Can a nonprofit operate a sober living home that a for-profit LLC owns?
Yes. A nonprofit can lease a house from a for-profit owner, and the pairing is common when the operator relies on grants. If a board member or officer controls the owning LLC, the IRS excess benefit rules apply, so the lease should be at fair market value and approved by board members without a conflict.
Can I transfer my house into an LLC if it has a mortgage?
Talk to your lender first. Federal law bars lenders from enforcing a due-on-sale clause for certain transfers, such as a transfer into a living trust, but a transfer to an LLC is not on that list. Moving a mortgaged house into an LLC without consent can give the lender the right to call the loan.
Choosing the Right Entity Structure for Your Recovery Home
If you own the house and run the sober living home, two LLCs joined by a written, fair-market lease usually protect the property best. If you lease from someone else, one operating LLC is enough. Whichever you choose, keep the companies separate in practice and review the setup with an attorney and a CPA. If you want to talk through how your structure fits your plans, contact the VSL team.
Research & Sources
- Delaware General Assembly. (n.d.). 6 Del. C. § 18-215, Series of members, managers, limited liability company interests or assets. https://delcode.delaware.gov/title6/c018/sc02/index.html
- Fannie Mae. (2025). Selling guide B2-2-01: General borrower eligibility requirements. https://selling-guide.fanniemae.com/sel/b2-2-01/general-borrower-eligibility-requirements
- Internal Revenue Service. (2026). Intermediate sanctions. https://www.irs.gov/charities-non-profits/charitable-organizations/intermediate-sanctions
- Internal Revenue Service. (2026). Publication 925, Passive activity and at-risk rules. https://www.irs.gov/publications/p925
- Internal Revenue Service. (2026). Single member limited liability companies. https://www.irs.gov/businesses/small-businesses-self-employed/single-member-limited-liability-companies
- Moore, R., & Ishee, Z. (n.d.). Using business entities to manage farm liability risk. The Ohio State University Agricultural & Resource Law Program. https://farmoffice.osu.edu/sites/aglaw/files/site-library/LawBulletins/StructuringFarmBusinessSeries/Using_Entities_Liability.pdf
- U.S. Code. (n.d.). 12 U.S.C. § 1701j-3, Preemption of due-on-sale prohibitions. Legal Information Institute. https://www.law.cornell.edu/uscode/text/12/1701j-3
- U.S. Small Business Administration. (2026). Launch your business: Business insurance. https://www.sba.gov/counseling/launch-your-business/#business-insurance
