LLC or Not from a Liability Standpoint?

Question

Hi, I'm looking into potentially putting a couple of rental properties into an LLC, more from a liability standpoint than anything else. I have umbrella insurance under my personal names currently so I'm wondering if the umbrella insurance would cover me in the event of some liability

Questions:

- Am I better off keeping the rentals in my name since I have umbrella insurance? or are there more advantages of transferring into an LLC and getting umbrella insurance for the LLC?

- What are the pros and cons to each of the above situations?

Thanks!

John Clark · Answer

Most personal umbrella policies do not cover business pursuits.

Savannah Wallace · Answer

Hi Jim,

For any investment of real estate, I’m going to recommend placing each property into an LLC for asset protection.

LLCs can help shield you from personal liability if a tenant were to ever sue as well as offer protection against creditors in case of a personal judgment through charging order protection, when the LLC has been structured appropriately. With the property in an LLC if someone were to sue the property the could only go after the assets in the LLC and not anything else (assuming you did not guarantee anything personally and the corporate veil has not been pierced). The rest of your properties would be shielded.

Also, depending on the structure, you can keep your name off the public record as the owner of the property and even as part of the LLC. For my clients I recommend that they place the properties in an LLC that has been formed in the state where the property is located and have the member of that LLC be a Wyoming LLC. This provides for both anonymity as well as charging order protection. Keeping your name off the public record as the owner makes you less attractive to sue, as it will look like you don't own anything.

The decision of whether to establish multiple LLCs, especially for each individual property, is a matter of individual risk tolerance and a cost-benefit analysis. While each LLC provides a dedicated layer of protection for a specific asset, there are ongoing costs associated with maintaining an LLC, such as annual registration fees, which can vary by state and may amount to a few hundred dollars per year. The cumulative cost of maintaining several LLCs should be weighed against the increased level of asset protection afforded by each separate entity. For my clients, I do believe that the benefit outweighs the costs and recommend utilizing separate LLCs.

Note: This information is for educational and informational purposes only and does not constitute legal, tax, or financial advice. No attorney-client, fiduciary, or professional relationship is established through this communication.

Jill Keller · Answer

@Frank Chin thanks so much! That info is very helpful!

Frank Chin · Answer

@Jill Keller

I personally owned and managed several rental properties, mainly one family, 3-families and been advised by a number of attorneys through the years to forget doing LLC's. The main reason cited that as a small property owner, not using PM's, if anything happens, the LLC and you will be sued anyway. I bought a business where the prior owner had it in an S-Corp, the S-Corp and he was sued personally for three million. He had insurance on the S-Corp for one million and none for himself. Fortunately, he moved to FL after the sale, bought a mansion as his retirement home, and saved by the state's homestead laws. The plaintiffs settled for one million, the insurance money.

I did put my business in an LLC, but got the LLC and myself insured for $3 million. The LLC was used in an active business for separation of the active business from my other businesses, rental for one. Active businesses have to get workman's comp, unemployment insurance etc., and mixing it with other business would cause much confusion. For a few rentals, forget the LLC's, just get adequate insurance.