LLC or Umbrella Policy?

Question

Hi everyone,

I’d like to open this for discussion. Can someone list the benefits/cons of LLC’s and Umbrella Policies? I keep coming across conflicting information and am getting very confused. I am just starting out on my out of state investing journey, and I have a company in Nevada trying to sell me on why I should open up an LLC there. The idea being that each property will have its own trust, and registered in whichever state I decide to own property in. Looking for explanations and advice, please!

Nathan Gesner · Answer

I just created a new LLC a couple days ago and you can see it here: https://wyobiz.wyo.gov/Busines... Notice my name and contact information are not located anywhere on the documents. I am purchasing a property under this LLC so nobody will see my name associated with the property in any public records. I currently own a dozen properties, all in my personal name, so someone wanting to sue me could quickly discover that I have a lot of assets. If they are owned in an LLC, it would be harder for them to find what I own. If they are in separate LLCs, it would be even harder.

The bad news is that there are expenses associated with each LLC. Setting one up will cost $100 - $200 on the cheap end (I just paid $200 for mine and did it online in 30 minutes). Each year you will have to file an annual report ($50 or more) and you have to file a tax return (a CPA will charge hundreds). If you have five properties and put each on in a separate LLC, it can cost you $1,000 or more to set up and easily that much every year for annual filings and tax returns. That's a big expense to protect you from the very, very, very rare instance that you may be sued.

Umbrella insurance provides ZERO anonymity but it can protect all of your properties easily and for little expense. I believe a $2 million umbrella policy will cost you $200 - $300 a year. If someone sues you, your primary insurance would pay first, then your umbrella insurance. Someone would have to sue (and win) for about $2.5 million before it would take your assets.

The average Landlord will never be sued over more than a security deposit dispute. The odds of you being sued for something larger than your homeowner's insurance would cover is astronomically low and not worth bothering about.

As you grow, I would recommend 1-2 LLCs to protect your anonymity and separate your investments from you personally. I would add an umbrella insurance policy for additional protection. Don't spend your money building ridiculous protections against an exaggerated threat.

Darius Ogloza · Answer

Everyone whose net worth exceeds the limits of standard homeowner and auto liability policies should look into an umbrella policy from a reputable provider.  This is probably as much asset protection as any small investor will practically need.  Single member LLC's provide less asset protection in many states than many investors realize due to local veil piercing laws (Google veil piercing LLC [YOUR STATE).  LLC's could provide tax advantages in states that with tax withholding laws, but again single member LLC's won't typically provide those advantages.

Alexander Szikla · Answer

Do both. LLC's are very cheap insurance. Keep each property in it's own LLC.

The umbrella policy is simply good form.

Jonathan Shnoravorian · Answer

Thank you everyone!!

Suzanne Player · Answer

You want to talk to an experienced attorney who practices real estate in the state in which you’re buying.  They will be able to advise on (& set up any necessary) LLC’s for you.

Attorneys use LLC’s to limit liability to the assets in the LLC’s name, in order to keep your personal assets (& assets in other corporations you own) away from potential creditors.  Many real estate investors put each property in its own corporation (newly formed when they acquire it), immediately dissolving that corporation when they sell their interest in that property.

Insurance may pay for covered losses, but it is always possible to have losses in excess of the policy limits (or losses the policy doesn’t cover at all).  You might possibly need both an LLC & an umbrella policy, depending on your personal situation (net worth, occupation, etc).  Your situation will change over time with your net worth, family situation (getting married, having kids).  You’ll want hazard and liability insurance for your properties, rent loss insurance might also be available in your area.  You’ll also want to talk to an experienced insurance broker about what your needs would be as you go along in your investing career.

I can’t give you legal and/or insurance advice for your personal situation,  you definitely need to talk to experienced professional in these areas until you get your questions answered and find people you want to work with as part of your team.

Evan Polaski · Answer

@Jonathan Shnoravorian, pros asset protection, cons more paperwork and administration, more cost, harder to secure loans.

Out of state investors tend to have a harder time finding financing as it is, when you start creating blind entities and holding companies across states, many lenders become very fearful and will not lend.  (I say this from my reading of these forums, not firsthand experience.  I only invest locally under a single LLC).

In my experience, I had one LLC that held all my rentals (up to 7 properties) with a common business account and credit card.  This meant if I got sued from any one property, that suit could access all 7 properties, but hopefully would not have been able to access my personal assets (I don't plan to ever test this).  The more LLCs you have, the more silo'd your risk is, but the more burdensome it is to do anything.

Often times, these remote state filings come down the anonymity.  I believe Wyoming is another common state to file, as there is no publicly available info on who the beneficial owner of the LLC is.

LLC or Umbrella Policy?

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