Husband and Wife Forming LLC for 1st Rental Property
David SchusterPro Member
Member since 2022 · 4 posts · 3 votesHusband and Wife Forming LLC for 1st Rental Property
Most Popular Reply
Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes
4yAn LLC is useful for two things: anonymity and legal protection. In most cases, neither is warranted.
Warning: I am not an attorney and this can be a complicated topic. Please note the information provided below is a layman's definition designed to provide a basic understanding for the general audience. You should consult an attorney or CPA for your specific situation.
ANONYMITY: When you create the LLC, your name is recorded on the documents and published on the Secretary of State website for all to see. So you're not completely anonymous. If you want to be completely anonymous, you can use a Registered Agent. The Registered Agent will record the documents on your behalf so only their name and information appears on the documents. I've done this with my properties because I'm well known in my small town and don't want people to know what I own.
LEGAL PROTECTION: By placing your assets in an LLC, you are legally separating them from your personal assets. If someone injures themselves and sues, they will be suing the LLC and not you personally. If your insurance coverage isn't enough, they could seize the LLC assets, but not your personal assets.
Additional thoughts:
1. An LLC is not free. You can spend as little as $100 to form an LLC, or you could use an attorney and spend $1,000 or more. There are also additional costs of operating and maintaining an LLC, like separate bank accounts, annual report filings, tax filings, etc.
2. There are rules to follow! If you fail to follow the rules, you may open your personal assets to a lawsuit. An example of this would be mixing your personal money and LLC money in the same bank account.
3. You do not need a separate LLC for each property or a series LLC! Don't make your life more complicated than it has to be. Most professionals will recommend a separate LLC for every $1 million in assets but I don't think that's necessary. In my case, I have residential rentals in one LLC, commercial properties in another, self storage in a third, and my real estate company operates in a fourth. Some have more than $1 million in equity while others have less.
4. The need for an LLC is grossly exaggerated on BiggerPockets and other websites. Have you ever heard of a Landlord being sued by a Tenant and losing property? I've been on this board since 2010 and haven't found an example yet. You've probably heard of big Landlords losing property, but only because they were flagrantly violating Fair Housing, running a slum, or otherwise violating the law in an egregious manner. You are more likely to be struck by lightning twice. The vast majority of lawsuits against Landlords are for wrongful eviction, security deposit disputes, and Fair Housing Violations. Your basic insurance policy with $300,000 in liability coverage should be sufficient in 99.999% of all lawsuits.
5. The best protection for you and your investments? Know and obey the law. I manage around 400 rentals with 12 years experience and have never been sued once. Even if I were sued, I document everything and obey the law, so I won't be found guilty. Even if I were found guilty, the cost would be in the thousands, not in the millions. Insurance would cover it, I would pay the deductible, and no assets would be lost.
If you are in an area like San Diego where people are more likely to sue, a judge is more likely to find you guilty, and the payout is likely to be higher, then you may consider an umbrella insurance policy. This policy will provide additional coverage above what your existing policy covers. It's easy to obtain, costs very little, and doesn't require additional, on-going effort to maintain.
The DIY Landlord Book4.7245 Reviews
13 Replies
- 4yBjorn AhlbladPro MemberInvestor · Shelton, WA · Member since 2017 · 6k+ posts · 6k+ votes
Yes have both you and your wife in the LLC. For whatever reason we are now caller 'Governor'. Does that make females 'Governess'? Anyway Governor is what we are now called. All the best!
- Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes4y
An LLC is useful for two things: anonymity and legal protection. In most cases, neither is warranted.
Warning: I am not an attorney and this can be a complicated topic. Please note the information provided below is a layman's definition designed to provide a basic understanding for the general audience. You should consult an attorney or CPA for your specific situation.
ANONYMITY: When you create the LLC, your name is recorded on the documents and published on the Secretary of State website for all to see. So you're not completely anonymous. If you want to be completely anonymous, you can use a Registered Agent. The Registered Agent will record the documents on your behalf so only their name and information appears on the documents. I've done this with my properties because I'm well known in my small town and don't want people to know what I own.
LEGAL PROTECTION: By placing your assets in an LLC, you are legally separating them from your personal assets. If someone injures themselves and sues, they will be suing the LLC and not you personally. If your insurance coverage isn't enough, they could seize the LLC assets, but not your personal assets.
Additional thoughts:
1. An LLC is not free. You can spend as little as $100 to form an LLC, or you could use an attorney and spend $1,000 or more. There are also additional costs of operating and maintaining an LLC, like separate bank accounts, annual report filings, tax filings, etc.
2. There are rules to follow! If you fail to follow the rules, you may open your personal assets to a lawsuit. An example of this would be mixing your personal money and LLC money in the same bank account.
3. You do not need a separate LLC for each property or a series LLC! Don't make your life more complicated than it has to be. Most professionals will recommend a separate LLC for every $1 million in assets but I don't think that's necessary. In my case, I have residential rentals in one LLC, commercial properties in another, self storage in a third, and my real estate company operates in a fourth. Some have more than $1 million in equity while others have less.
4. The need for an LLC is grossly exaggerated on BiggerPockets and other websites. Have you ever heard of a Landlord being sued by a Tenant and losing property? I've been on this board since 2010 and haven't found an example yet. You've probably heard of big Landlords losing property, but only because they were flagrantly violating Fair Housing, running a slum, or otherwise violating the law in an egregious manner. You are more likely to be struck by lightning twice. The vast majority of lawsuits against Landlords are for wrongful eviction, security deposit disputes, and Fair Housing Violations. Your basic insurance policy with $300,000 in liability coverage should be sufficient in 99.999% of all lawsuits.
5. The best protection for you and your investments? Know and obey the law. I manage around 400 rentals with 12 years experience and have never been sued once. Even if I were sued, I document everything and obey the law, so I won't be found guilty. Even if I were found guilty, the cost would be in the thousands, not in the millions. Insurance would cover it, I would pay the deductible, and no assets would be lost.
If you are in an area like San Diego where people are more likely to sue, a judge is more likely to find you guilty, and the payout is likely to be higher, then you may consider an umbrella insurance policy. This policy will provide additional coverage above what your existing policy covers. It's easy to obtain, costs very little, and doesn't require additional, on-going effort to maintain.The DIY Landlord Book4.7245 Reviews - 4yPeter MckernanBusiness MemberResidential Real Estate Agent · Irvine, CA · Member since 2013 · 2k+ posts · 1k+ votes
Quote from @David Schuster:
Hello all, my wife and I have recently purchased a new house and plan to rent out our current home when we move out. I am working on setting up the LLC to move the soon to be rental home into and I have a few questions:
1. My wife and I will be the only members in the LLC should it be filed as Manager-Managed or Member-Managed?
2. Do I need to file the LLC in both our names to enable us to take full tax advantage?
Thanks in advance for your help!
Manager-managed and both your names as 50/50. The tax liability then will also help you both making sure that you are both getting the tax advantages and that you are both filing as the LLC. All the monies flow through there and then you can pay yourself as a distribution as well!
The McKernan Group4.957 Reviews - 4yRik HunterBusiness MemberReal Estate Agent · Chattanooga, TN · Member since 2020 · 107 posts · 62 votes
Lots of BP podcast episodes concluding that this sort of corporate veil is easily pierced and that you can use an umbrella insurance policy for greater protection than without it.
There was the OG BP podcast episode this April that walks us through various types of asset protection:
My wife and I started a LLC with 50/50 share.
As mentioned previously by @Nathan Gesner, separate everything between personal and business activities. I used google doc/sheets to record everything (going to home depot, purchased Amazon, etc), along with travel miles.
Separate bank accounts for sure.
Also used a separate umbrella insurance policy for additional protection, since my wife and I have plenty to lose even outside of our LLC/property investments (our regular daytime jobs...).
Operating Agreements with addendums will be required for lots of functions with big purchase, loans, etc.
We used Zen Business to open one with a registered agent. Quite easy.
@David Schuster You should secure the services of an attorney licensed to practice law in the State where the property is located.
As a new investor, you should assemble a team of experts to help you, such as CPA, Attorney, Realtor, General Contractor, HVAC, Plumber, etc.
I can't tell you how many times I seen people "do it yourself" and screw themselves royally. Be a professional - do things right the first time.
Best wishes and good luck to you.- Member since 2022 · 4 posts · 3 votes4y
Lots of feedback really appreciate it! I guess I'm still a bit confused on why Manager-Managed is the way to go as opposed to Member-Managed? Since the LLC will only consist of my wife and I (we have no intentions of taking on any additional employees or investors in this LLC) we would be the sole member/owners right? It sounds like a Manager-Managed would make sense if we had investors, employees, etc. that we would need to vote/sign off on decisions and wanted to designate a Manager to handle the day to day ops. Am I missing something here?
Also wanted to note we plan to keep the LLC finances 100% separate from ours, the goal is to make sure we are both listed on the LLC appropriately so we can use the property/LLC to help minimize our tax liabilities within the law...that is where the CPA will come in.
With regards to building a team, various insurance coverages, etc. I have those pretty well in hand, I just can't justify spending and additional ~$700 on an attorney to check a box when I have access to all of you wonderful intelligent and helpful people!
Quote from @Nathan Gesner:
An LLC is useful for two things: anonymity and legal protection. In most cases, neither is warranted.
Warning: I am not an attorney and this can be a complicated topic. Please note the information provided below is a layman's definition designed to provide a basic understanding for the general audience. You should consult an attorney or CPA for your specific situation.
ANONYMITY: When you create the LLC, your name is recorded on the documents and published on the Secretary of State website for all to see. So you're not completely anonymous. If you want to be completely anonymous, you can use a Registered Agent. The Registered Agent will record the documents on your behalf so only their name and information appears on the documents. I've done this with my properties because I'm well known in my small town and don't want people to know what I own.
LEGAL PROTECTION: By placing your assets in an LLC, you are legally separating them from your personal assets. If someone injures themselves and sues, they will be suing the LLC and not you personally. If your insurance coverage isn't enough, they could seize the LLC assets, but not your personal assets.
Additional thoughts:
1. An LLC is not free. You can spend as little as $100 to form an LLC, or you could use an attorney and spend $1,000 or more. There are also additional costs of operating and maintaining an LLC, like separate bank accounts, annual report filings, tax filings, etc.
2. There are rules to follow! If you fail to follow the rules, you may open your personal assets to a lawsuit. An example of this would be mixing your personal money and LLC money in the same bank account.
3. You do not need a separate LLC for each property or a series LLC! Don't make your life more complicated than it has to be. Most professionals will recommend a separate LLC for every $1 million in assets but I don't think that's necessary. In my case, I have residential rentals in one LLC, commercial properties in another, self storage in a third, and my real estate company operates in a fourth. Some have more than $1 million in equity while others have less.
4. The need for an LLC is grossly exaggerated on BiggerPockets and other websites. Have you ever heard of a Landlord being sued by a Tenant and losing property? I've been on this board since 2010 and haven't found an example yet. You've probably heard of big Landlords losing property, but only because they were flagrantly violating Fair Housing, running a slum, or otherwise violating the law in an egregious manner. You are more likely to be struck by lightning twice. The vast majority of lawsuits against Landlords are for wrongful eviction, security deposit disputes, and Fair Housing Violations. Your basic insurance policy with $300,000 in liability coverage should be sufficient in 99.999% of all lawsuits.
5. The best protection for you and your investments? Know and obey the law. I manage around 400 rentals with 12 years experience and have never been sued once. Even if I were sued, I document everything and obey the law, so I won't be found guilty. Even if I were found guilty, the cost would be in the thousands, not in the millions. Insurance would cover it, I would pay the deductible, and no assets would be lost.
If you are in an area like San Diego where people are more likely to sue, a judge is more likely to find you guilty, and the payout is likely to be higher, then you may consider an umbrella insurance policy. This policy will provide additional coverage above what your existing policy covers. It's easy to obtain, costs very little, and doesn't require additional, on-going effort to maintain.For your residential rentals are any owned without a mortgage? If so, how do you best protect those assets from liability in comparison to those with a lender?
- Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes4y
Quote from @Angie Cal:
That's another reason why it's beneficial to keep properties mortgaged. I don't own any outright. I'm also well-versed in the law, I obey it, I treat people honestly and fairly, and I'm probably in one of the least-litigious states in America, so my risk is low.The DIY Landlord Book4.7245 Reviews - Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes4y
@David Schuster
LLC is a pass thru entity it provides no tax benefit. If you refer to depreciation if you file a joint tax return it does not matter if it's one of you or both of you as it flows to your personal return
Not an accountant or cpa but I am only on my LLC and it goes into our joint return
7e investments53 Reviews - Insurance Agent · Norwalk, CT · Member since 2016 · 2k+ posts · 1k+ votes4y
David,
If you go the LLC route, be sure your Dwelling Fire policy on the Rented house shows the LLC as the named insured. If you get an umbrella policy, it may be possible to list both the LLC and your personal names so it covers over both your new home, your autos, and the LLC property. Some companies will do that if the LLC is owned by spouses with out others.
- Member since 2022 · 4 posts · 3 votes4y
Thank you that makes sense! Since we file jointly it really doesn't matter if the LLC is manager-managed or member-managed as long as one or both of us are listed as member, and yes I was referencing depreciation.
That is a very good point I haven't crossed that bridge quite yet with the rental property but I will discuss with my agent to let them know the rental property will be moved into the LLC at some point. Currently both homes, and vehicles are listed under the umbrella in our names.
Both properties are mortgaged. Currently everything is insured in my and my wife's names as the LLC hasn't been formed yet, once the LLC becomes official I'll circle back with the info I receive from my agent with regards to whether or not the LLC can be listed as insured on the umbrella.
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