LLC's .. Are The ABSOLUTELY Necessary?
Hello all,
Newbie investor here.
I am getting itchy to start looking for investment properties. My question is,
Are LLC's really worth the hassle, or do I really not need this much protection from possible Lawsuits?
I will be renting out a Single Family Home, and I will living about 2 hours from the location of this property.
Thanks for your advice
-John
John,
Liability protection is a question best answered after consultation with your attorney. Only you know how important an item like this is to you.
In my personal view, an LLC is not much hassle for the level of protection they afford. Complete asset protection, if that even exists, can get expensive. As your assets grow, so might your need for asset protection.
The LLC offers asset protection but the cost of liability insurance might cause you to pause. Say $550 in name of individual or individuals might increase to $1400 if named insured is an LLC or corporation. If you rely on insurance for asset protection it is less costly and might be sufficient if you have an adequate umbrella policy.
Hmm... here is a slight problem..
In the event that an LLC is sued, is the Property in danger? Or just the cash in the LLC's account?
The reason I ask is.. Lets say I do this, and create an LLC and put my investment property in it. Well, I own no property, and after I pay the downpayment on the loan, I will maybe only have like $5k - $10k in my bank account.
But the Value of my investment property will be well over $200k.
So the problem is, If I get sued, and the LLC's property is lost, well I am in BIG trouble because my LLC was HOLDING all of my valuable property.
You see what I mean here?
This makes me think that a hefty amount of insurance may be more what I need.
any thoughts?
Go to my profile and click on the article submitted by me busines entities. I think it explains this in fairly good detail.
[addsig]
Couldn't he "UCC" everything that the LLC owns to another REAL corporation (a nevada corp that he owns) and in the event of getting sued, the OTHER corp takes over the assetts, leaving the LLC with NO assetts?
Just a thought, i may be wrong (and probably am) but maybe close? -
Cheers!
L.
People, please. Let's not try to make the questions harder than they need to be.
Jeff gave you the simple, and most correct way of handling this topic. If you're really curious, run it by your attorney.
However, the basic, and easiest answer is that the main purpose of an LLC (or any entity) for small business owners is to separate personal and business assets so if the business is sued, the owner's personal property cannot be taken. An LLC, by itself offers no liability coverage. Whether you're an private owner or business, you will have to get insurance if you want liability coverage.
Now, back to the point, if you have little to no personal property to protect, then what is the point of paying to setup and manage an LLC? Add to this, that most people don't take their LLC, or other entity seriously enough to properly keep up the paperwork, so if sued, the "protection" that the entity provides is easily pierced by the courts.
Roger
I reviewed the report prepared by Stockpro99 regarding business entities and found it very helpful. However, I would like more information on Stockpro99's opinion that the best way to hold property is in a trust with the LLC as beneficiary? Would the trust be a living trust? What are the advantages and disadvantages? Thank your for your attention and courtesy.
John,
There's more to it than only liability protection, but there are also tax advantages unless all of you income comes through earned income.
It really isn't that big of a deal to form an LLC. You can pick up Nolo press' kit for about $70 and $125 in filing fees be done with it. I obtained my C Corp for another business of mine last January and personally handed in the paper work in Sacramento and was handed back the approved paperwork in 45 minutes. I think there's also a filing office in SF. The big problem in CA is the $800 minimum tax fee after two years. I don't know if this applies to LLCs, but it definitely applies to C Corps.
HTH,
Robert
[addsig]
Hello again
I figured I'd give a little update. Thank you all for the replies by the way..
I've been doing a little research, and it seems that setting up an LLC isn't such a big deal.
For those of you that are newbies like me, it seems that to get the Full effect of an LLC you have to file in a state that follows the Revised Uniform Limited Partnership Act (RULPA).
OK.. With that said...
My next thing to research is the ORDER in which to do this?
I could....
A) Create the LLC then go to the lender and get the loan.
Possible Downside:
Raised interest rates, and unforseen other "COST additions" that will make the loan less desireable.
or
B) Purchase the property and then Transfer it over to the LLC.
Possible Downside:
The Lender could "Call the Loan" and therefore I am back to square One... looking for another lender.
The bottom line I guess is to contact the lender and ask them.
Not that I am complaining.. but it seems that for every One question I answer.. Three more questions appear :-o
[addsig]
The trust is a simple land trust that is easily created and is the best shield of your ownership in the property. It is merely a tool to keep prying eyes from knowing who really owns the property and keep potential creditiors from attaching your assets (i.e IRS liens, a tenant falls and sues you etc.) it costs very little (filing fees) and is a good step to take in asset protection. I use the LLC as the beneficiary in order to protect the property in the event that there is a lawsuit that pierces the trust.
If I am getting active income however I prefer a S corp to take profits due to the self employment tax involved with LLC's.
HOpe this helps.
[addsig]