I’m a newbie still learning and doing a lot of research on investing. Right now I have three properties, one of which is my home. Can someone educate me as to the benefit of an LLC? Thanks!
Asset protection.
Members of an LLC are not personally liable for liabilities from within the LLC.
For example, little Suzie slips and falls on that loose board that you didn’t repair yesterday and breaks her neck. Mama sees the ad for “The Texas Hammer” atty on Springer the next day and decides to sue you.
The first thing the atty is going to look at is “what you own”. He finds that you own three properties, two of them free and clear of mortgages; plus you probably have liability insurance. These assets are available to seize in a judgement, or settle any claim against you. He takes the case. You lose. The judgement is in excess of your million dollar liability umbrella, so you have to sell your investment properties to settle.
OR
He finds that the property is owned by an LLC and is encumbered by a mortgage (to your brother, but he doesn’t know that). If he sues you personally as a negligent manager, he sees that you don’t own a house (it’s in a trust, right?) and have no cash investments in your name. Since there are no assets he can easily get to, he offers to take Mama’s case for $250 an hour. She doesn’t have any cash laying around, so she goes away.
OR
He decides to go ahead with the case and you lose. He can’t get to your personal residence. And he can’t get to your other rental property, because you don’t own it (a 2nd LLC does). He may be able to force the sale of the house in the LLC, but it’s mortgaged, so there’s not much there. They settle for whatever your insurance co pays, and you keep at least one of your investment properties so you’re not starting from scratch.
the scenarios are endless, but the bottom line is that no one should own investment property in their own name. $500 to set up an LLC and a little hassle with bookkeeping is cheap insurance. The idea is to seperate your assets (property) from the risk (dealing with people, usually).
LLCs are preferred to corporations because corporate stock you own is considered an investment. Investments can be seized in a judgement giving your adversary control of the company’s assets. LLC memberships are considered personal property by statute. As such they cannot be awarded in a judgement so an adversary cannot gain control of the company.
both LLCs and corporations protect you from liabilities within the company. Only the LLC protects the company from your personal liabilities.
Thanks for your reply. The scenarios help a lot as well!