Do I really need my LLC?

Question

I have a few rental properties, all financed via conventional mortgages in my own name, and property titles also in my own name. I also have an LLC.

When I rent out these properties, the rental contract is between the LLC and the tenant. Rent is received in the bank account of the LLC.

In this scheme, is the LLC providing me any protection at all? What stops someone from suing me directly, or in addition to the LLC?

Jaysen Medhurst · Answer

You're not properly structured, @Amol K. As @Mike S. points out, your LLC has no business renting out the property. One other potential liability is that you may be exposing any other assets held in your current LLC. Best to keep properties in a separate entity. For example, if you own a dry cleaner, don't put your rental properties in the same LLC as the dry cleaning business.

One clarification to Account Closed's post, there are no tax benefits to holding property in a LLC. This is a common misconception.

JD Martin · Answer

We use a DBA (doing business as). That provides a semblance of professionalism and "arms-length" appearance from just having your lease, etc as your name, but resolves the issue of trying to have your properties in an LLC. Because we have grown enough and have enough properties f&c, we are moving in this direction but I have enough insurance that I feel very comfortable existing on a day to day basis.

It also depends on where the bulk of your wealth/assets are. If they are in the actual rental properties, the LLC doesn't do a whole lot for you unless you were going to set up separate ones for each property, as an adverse judgement would go against the property anyway. If you have little in the way of equity in the properties, and most of it somewhere else, and that number is substantial, you have a better argument for an LLC - and this is the route some people go; they mortgage the property to the hilt, and shift the equity somewhere else. But that depends on whether or not your lender will allow you to hold the property in an LLC. Most of the time you will need to have started the LLC with some funding so that it can stand and acquire property on its own if you want it to truly shield assets, as courts have ruled that shell LLCs that have no assets or standing can be overridden to access your personal assets.

Amol K. · Answer

Dear All, thank you very much for your answers. Below are some clarifications to the questions you had:

@Mike S., the LLC is acting in the capacity of the appointed rental management agent for me.

@Jaysen Medhurst, the LLC has no assets in it. I am purely using it as a rental management company.

Account Closed, perhaps your client is comparing an LLC to a C-Corp. I am comparing it to not having any company at all, and doing rental management in my own name.

So would it be correct to conclude that with the way I am currently structured, the legal risk is about the same as not having any LLC at all? Does the situation change if I transfer the properties to the LLC? The reason I dont do that is to enjoy the low interest rates offered by conventional personal mortgages, instead of taking business loans.

Is this a correct summary of my options:

Option 1: stay as isOption 2: dissolve the LLC and conduct rental management in my own name (not higher legal risk than Option 1)Option 3: get a higher interest rate business loan in the LLC's name, transfer properties to LLCOption 4: Option 2 + get PUP insurance as @JD Martin recommended

Account Closed · Answer

Thank you for clarifying Jaysen Medhurst. Although I have not had this first hand,  I have had clients with an LLC say that they have seen tax benefits of the company’s rental property income “passing through” as the business owner by it flowing through their individual income tax return minimizing the amount of money taken out of their income for taxes.

I would like to hear more on your thoughts about this.

Account Closed · Answer

Creating an LLC for your rental investment properties is a smart choice as an investor. It reduces your liability risk, effectively separates your assets, and has the tax benefit of pass-through taxation.

JD Martin · Answer

Short answer: No. Any competent lawyer would easily "pierce this veil", as the saying goes. You would be better off (in my opinion) with a good PUP (personal umbrella policy) and maximum liability limits on your rental insurance. That would cover you in all but inconceivable negligence (i.e. you purposely go and do something to burn the house down with all the occupants in it, etc).

As to your question "What stops someone from suing me?", the answer is nothing. Anyone can sue anyone for virtually any reason in the US. That doesn't mean they will be successful, but if you are just trying to avoid any possibility of a lawsuit it's a fruitless effort. Do things reasonably by the book and keep good insurance.

Do I really need my LLC?

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