Attached ADU LLC or Sole proprietorship?

Question

Hi. We’re getting our attached ADU ready for long term rental in LA County. A lot of the Airbnb type of business recommends creation of an LLC for separating personal and business assets. For long term rentals does it benefit as well?  Is a Sole Proprietorship better in our situation since we are living in the property?  Should we even bother opening up a separate business entity?

Just want to see if there are people here in the same situation and learn from what they’ve done. Thanks!

Janice Evardome · Answer

Just to update those that are following this thread. We met with our accountant and was told to file Schedule E (Form 1040) with our return next year.

John Mocker · Answer

Janice,

I recommend reviewing this with your insurance agent to find out:

- will the existing insurance carrier cover the ADU Rental or AirBnB rental

- will the policy need to be endorsed or replaced to get the coverage

- will the existing policy be able to add the LLC if you set it up

- will you have to replace or add a second policy to get it properly covered

Megan Templeton · Answer

Hi there! I would recommend an LLC to hold the ADU. Stats say that if you are an investor for more than 10+ years, you have a 90% chance of being sued at some point. For long term investors, its not so mcuh of if you will be sued, but when. While insurance is a good first line of defense, it is not conclusive. Insurance companies are a business and inside of that looking to mitigate costs. In doing so, they will often find reasons to not pay out on a claim. If thats the case for you, you want a true line of defense in a lawsuit - thats where an LLC comes in. An LLC separates you from your business so that if your are sued, your personal assets arent at risk. Using an LLC not only provides liability protection but can open up opportunities for you for working with 3rd parties such as lenders or partners who require an LLC. If your LLC is set up correctly, the operations and financial pieces of it can be minimal and easy to manage.