Do I have to set up an LLC?

Question

If the purpose of an LLC is to protect my personal assets, can I forgo setting up an LLC and instead purchase personal liability insurance? Does anyone know the pros and cons of doing each? I honestly a little intimidated by the notion of an LLC and what it involves.

Marcia Maynard · Answer

@Tony T. You do not need an LLC when starting out, unless your goals indicate the need. As others have said, perform in a manner that reduces your risk, get insurance on the property and additional liability protection through an umbrella policy.

We formed our LLCs for business operating reasons.  When we decided to form the LLCs for our residential rental property business, we sought the services of a attorney who was well qualified for this. She guided us through the process of defining how we wanted to run our business and drafted our operating agreement.  We could not have achieved the same goal without the expertise of someone who had the experience.

As you become more involved with real estate investing and managing rental property, you will need a qualified tax professional on your team. An EA (enrolled agent) serves our needs well. If our holdings were more vast, a CPA (certified public accountant) would be in order. Tax time is nothing to fear or dread, as long as you do your business in an ethical manner and keep good records. Let the tax professionals do for you what they do best and focus yourself on the aspects that you do best.

Johnny Aloha · Answer

@Jesse Reese Actually, you don't need to live in the state to rent a property ... but you do have to list a local POC - which could be a friend, or it could be a property manager.  Just someone the tenant can call in an emergency.

Bill Gulley · Answer

You need liability coverage either way, do not rely on a closely held LLC to shield you from liability especially if you manage the property. Starting a company should be for business reasons, the limited liability aspect is usually misunderstood and should not be the primary reason to form any entity. A popular school of thought but you can do just as well and make life easier holding properties personally with a good insurance policy. :)

Jesse Reese · Answer

@Johnny Aloha

Thank you for the clarifying!

Tony T. · Answer

@Marcia Maynard

Thanks for the well thought out response...sounds like great advice!

Jesse Reese · Answer

I'm not sure in your state but for example in Hawaii you have to live in the state to rent property. One way around this is to hire a property manager here to do it for you

Tony T. · Answer

How does having a property manager shield you from lawsuits (if at all)? Are there examples of things that a PM would liable for versus the owner? Or is the owner on the hook for everything that a tenant might sue for regardless of whether you have a PM or not?

Tony T. · Answer

Thank you ALL for the well thought out responses...as a new BP member (I joined last night!)...I am completely overwhelmed by the people on this board (in a great way! = ))

To provide a little more detail...

I own 7 SFH's and have little interest in forming a business (as I have a day job that I'm focused on)...however, I'm primarily interested in asset protection and am hoping my umbrella personal liability insurance is enough to accomplish this.

Yes, in CA, there is a $800 annual LLC fee that we have to pay. This isn't the main reason I'm shying away...I loath tax time and would dread having to do taxes twice.

I'm very new to this whole scene and appreciate this board as I can already see its benefits.

Looking forward to learning and contributing!

Jean Bolger · Answer

I have read here on BP that LLCs in California are much more expensive than the $50 (Colorado) fee mentioned above, As in, something like $800 annually? I may be misremembering, but do make sure you know the details before you decide. IMO (which admittedly is not an expert one) single owner LLCs are over-hyped for smaller investors.

Do I have to set up an LLC?

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