Readers frequently write in and ask me whether or not I recommend putting their properties into an LLC. While this is a very personal choice, I will tell you why I do not go this route. Of course, keep in mind while reading that I am not a lawyer or a tax accountant so you will have to use your best judgement or may want to get a professional opinion.
First up: The LLC.
LLC stands for Limited Liability Company and the reason people like them so much is that they provide a veil of protection between you and your property in the rare circumstance that someone decides to sue you. If you are reading this from outside the US, you likely will have less to worry about, but in the sue happy United States of America, you could have this unfortunate scenario befall upon you for a numbers of reasons: tree falls on a house, dog bites a person, slip and fall (especially if you have stairs), pool incidents, contractors getting hurt, a car accident that goes above your liability or bodily injury limits designated on your Auto Insurance, etc. Again these occurrences are rare but if your property is in your personal name your home can be taken away in a lawsuit, and if the opposing lawyer finds out you are a property owner, they may push for a higher claim just because.
Wow, what a bummer. Sorry to be the bearer of bad news. I definitely try not to think about these things much and yet I feel a responsibility to help get your fledgling business set up right!
Set up is easy! Simply log onto your Secretary of State website and search the database to see if your well crafted name (you can use the address, i.e. 124 Pimbrook Lane, LLC. or your own creation, i.e.RichDudes, LLC.) is still available and purchase! They take some basic info and usually around $50 to set it up, then voila, you are an official business owner! You will need an EIN and operating agreement (if you have a partner in the deal) -- both easy to do.
Protection from lawsuits. This can be misleading. If someone wants to sue your 124 Pimbrook Lane, LLC. they can still try to steal your home or at least the equity you have it in; they just cannot as easily touch the rest of your assets.
You have to file paperwork annually per LLC..
A senseless added expense: If you use a preparer to do your taxes they charge $600+ per LLC just to file them (even though my trusty friend, The Wealthy Accountant says it is simply just a box they check for LLC that makes the difference).
It can be harder to get a loan. Your name has a credit score and earning history attached to it, if you use an LLC is starts from zero, so you have to build up a trustworthy record from scratch.
Once you have a loan, they don’t want you to switch. If you buy it in your name and want to roll it over into an LLC afterwards the lenders will throw a fit. So you will want to wait until it’s paid off.
If you choose to do a different LLC per home, as most people do for the protection from the other assets, just multiply all the cons above.
The Contender: Simply your name (+wife or business partner).
Oh simplicity, I hear the birds singing already…
Easy peasy, no additional paperwork (besides that whomping stack of mortgage contracts) to file.
You can list yourself and all owners - you will still want an operating agreement to clearly explain all the terms of the split ownership.
Taxes are pretty simply, just file a Schedule E for a Rental Property Business
Loans are as simple as you can call them.
Asset Vulnerability: yes this is the big “what if”, but just wait, I have a solution to share with you, of course….
The Perfect Combo?!:
Your Name + An Umbrella Policy!
“What’s an Umbrella Policy?”
I first heard of this little winner when I was flip flopping on the ideas of whether to not LLC and finally asked my experienced friend Greg. Greg owns about 19 condos and is all about ease and simplicity. He told me that he covers them all with one Umbrella policy for 2 million (you want something around your Net Worth). The best part? All that extra coverage only costs him $250/yr!
How does it work?
An Umbrella policy links up with your car insurance and homeowners insurance and in the case of a lawsuit, takes over where the other coverage leaves off. If you get in a bad car accident and the damage is over your $300,000 policy, the Umbrella starts there and extends to the maximum coverage you have purchased (ex. 1 million). You still have to pay your deductible on your car insurance, but $1,000 is a very small price to pay for $1 million in protection. This works the same on the home side.
If you own over 4 homes, like I do, you will likely need to get a Commercial Policy. This means it is based solely off of your homes and not your car. You can also opt for a Personal Policy but I have decided against it for now since we keep good coverage on Ben’s car and I mostly walk and bike to get around.
Interested and want a contact?
-My Colorado State Farm Agent: Angelo Chavez - (303) 954-0509
-My Missouri State Farm Agent: Brad Busch - (314) 721-8686
Live in another state? Either one can give you a recommended contact (I am not making anything from this referral, I just like to connect good people with business =) )
You definitely don’t need to do as I do, I just want you to be informed so you can make the best choice for you. Go on and conquer!