Putting an investment or rental property into a limited liability company (LLC) can be a great way to protect your personal assets from any liabilities of the property(ies).
An LLC is a legal business entity. If someone sues an LLC, in most cases, only the assets of the LLC will be subject to liability in that lawsuit. The personal assets (banks accounts, residence, etc.) of the business owner would be protected or off limits. In terms of a rental or investment property, then, if you form an LLC and somebody gets injured on the property and wants to sue for damages, they would have to sue the owner of the property, which would be the LLC. And they would only be able to collect from the assets of the LLC (i.e. the property itself and any additional business assets such as bank accounts). So, the purpose of having an LLC for your investment or rental property is to insulate your personal assets from the liabilities of the property.
Clients who have multiple rentals always want to know if they should form an LLC for EACH property. But this is something the client needs to decide based on their risk tolerance. Some feel ok putting all of their “eggs” in one basket and others don’t. Just remember if there is a lawsuit regarding one property in the LLC, all of the other properties in the LLC will be at risk too. However, if you have a separate LLC for each property then each one would be insulated from the other. Having multiple LLC’s can create slightly more administrative and accounting work but some clients think the extra work is worth the extra liability protection.
Another important piece is making sure the LLC actually owns the rental property. Typically, this is done by a deed transferring the property to the LLC. If there is a mortgage on the property, it is always good to check with the mortgage company to ensure such transfer will not trigger the “Due on Sale” clause.
Lastly, it is important to operate the LLC(s) as a business—having a separate bank account, make sure the landlord in the lease agreement is the LLC and all rent checks are paid to the LLC.
If you are interested in setting up an LLC or a rental property or have questions, please schedule a consultation.