LLC Misconceptions and Education
So bear with me - I'm no expert and am simply trying to help instruct others but also educate myself if I'm incorrect on what I know. I've been reading up today on a bunch of forums including this one and see WILDLY varying beliefs on LLCs, insurance, and protecting assets. I see a TON of directly conflicting information about stuff that should be set in stone and it's a little concerning. So help me out here, and hopefully this can help others.
1. LLCs and Insurance are completely separate purpose liability shielding tools. In fact, it seems you should be using both for the best possible protection. When someone sues you, you first check if your insurance will cover the damages. If your insurance runs out, or your insurance says you screwed up, they go after your personal assets. At this point, an LLC matters. If your LLC was sued, they can only take your LLC assets. If you personally were sued, they can take everything from you.
2. LLC's serve to separate your assets from each other, so if one is targeted in a lawsuit, your other assets are protected. If you own a rental home in an LLC, and own your personal home in your name. If your renter sues you, they must sue your LLC. If they win damages, and those damages go above your equity in that home and assets in that LLC, they cannot then go after your personal home.
3. Insurance serves as a monetary buffer between whoever is suing you, and your assets that are included in the lawsuit. Insurance does not cover 100% of issues, as often insurance companies are notorious for trying to weasel out of any lawsuits and blame you. They are in business to make money, not help you.
4. LLC's do not have coverage issues like insurance does. They cover you completely regardless of the issue at hand, UNLESS someone has 'pierced the corporate veil' which means they found a way that your LLC was not in compliance. Usually, there are 3 issues that you must keep up with in order to prevent this. A. You must have financial separation. Keep a business bank account that you ONLY use for your LLC revenue/profits/expense etc. B. You must have yearly corporate minutes. This means once a year hold a meeting with your LLC members, and write down notes in a journal. C. You must have all your proper paperwork, documentation showing ownership, rules, etc. Articles of Organization is one example. This varies by state.
5. If someone sues your personal assets, your assets within your LLC are protected (varies by state, and sometimes they can take distributions?)
6. In an ideal world, everyone would put each house under a separate LLC, then they would get proper STR home insurance, and THEN they would get umbrella insurance on top of that. This is obviously the most expensive, but should be the most protective.
7. Airbnb/other booking website insurance is often useless. Don't count on the $1 million insurance policy they claim every owner has. There are countless horror stories online about airbnb weaseling out of claims. If your insurance company wants to weasel out of claims, you can bet that airbnb has even less interest in paying up.
8. LLCs for the most part are not expensive. They are pass-through entities that will not change your taxes whatsoever(unless you go S corp, but thats another topic entirely). Usually its $100-$300 to file in each state, and perhaps aonther $100 a year to maintain.
9. It is not difficult to maintain your LLC status. Doing the 3 things to maintain your corporate veil I mentioned above are not difficult, and are just a few hours a year of effort.
10. A significant number of lenders do not want to give a loan to an LLC, because they want you to be personally liable if you default on the mortgage. Consequently, it is difficult in some ways to transfer ownership from a personally owned asset to one with an LLC, because it MUST be run by your mortgage lender. You can't do it without refinancing with them, often incurring title transfer taxes (thousands of dollars based on state) and mortgage fees.
11. Some ordinances in certain counties/states do not allow STR's to be held by an LLC. Check with your local county and regulations for applying for an STR permit to see if this is the case.
Again I'm not an expert, and I'd love to be called out! Please correct me on anything that is incorrect or a misconception here. Cheers.