I have seen several old post on the pros/cons of having an LLC and umbrella policy. I was hoping get some recommendations on whether or not I should seriously consider starting an LLC (California resident) and/or umbrella policy. I am relatively new to investing will have 4 units within the month. Does it make sense, financially, to start an LLC?
@Ramon Vazquez , LLCs is good for separating your assets into different legal entities so that they are not all exposed to the same liability. Umbrella policies are good for paying off a judgment should you lose and paying for legal expenses should you get sued. They accomplish different things. What is best for you is highly dependent on your situation. That is further complicated by the fact that LLCs are VERY expensive in Cali compared to pretty much the rest of the country.
There are several considerations that can go into the analysis of whether you need an LLC or whether a large insurance policy will suffice. Will depend on several factors like the type of property, type of tenants, your risk tolerance, other assets you own, your estate planning, laws where the property is located, etc.
Any lawsuits would be limited to the assets of the LLC and not your personal assets (assuming you run the LLC appropriately and the corporate veil is not pierced). But, an LLC will not limit you from liability in total. You can still lose your investment in the LLC.
If you have put in an offer on a property, it is not too late to put the property into an LLC. Finish out escrow and then you can transfer the property into the LLC. The value of the property you contribute to the company will become your basis in the company and from that point forward the entity will own the property and not you. And you should treat it as such (separate bank accounts, contracts, insurance, etc.). The LLC will be a pass-through entity and all items of income will be reported on your personal tax return, but you still should keep separate books for the entity.
You also want to look at whether a pass-through entity helps your bottom line and your taxes. There is a new 20% pass through deduction you may qualify for that could help you, but not everyone qualifies.
These are all things you will want to discuss with your attorney and CPA. If you need references for either of them in San Diego, or I have an accountant in LA, let me know, but I can't say I know too many of them in your area.
*This post does not create an attorney-client relationship or CPA-client relationship. Readers are advised to seek professional advice.
1. If your networth is less than 250k, that’s if you sell everything you have and pay everything you owe today, you’ll have cold cash of 250k tomorrow, no entity is worth it.
2. If you don’t know how to file, maintain, and correctly follow-up on the llc/corporation, you’ll be a sitting duck, get sued, and llc is useless.
3. You are in CA where corporate veils are easily pierced, especially on an employer-employee or a tenant-landlord case.
4. If your LLC is new, and it will not qualify to get a loan on its own, meaning you have to co-sign personally aka personal guarantee it, then your llc is useless. Tenants can go after the asset, and since you guaranteed it, whatever happens to the house, you use personal assets to cover the debt.
I have 20 more but I doubt I want to go that way.
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