Posted by Dave (CA) on March 07, 2001 at 14:45:18:
I agree with you on the gross negligence. You can definitely be proactive about things. I’m not sure what the insurance company would do. In your case, it really doesn’t do them any good to fight a $5M judgement unless they think they can get it reduced under $1M. Let’s look at a different scenario. What if you (or your kid) gets in an auto accident that’s your fault. Again, a judgement is rendered that is greater than your auto insurance. So they’re going to go after the equity in your house and rental property. But if you have the rentals in an LLC, I don’t believe they can get to them. True?
I was thinking of putting my properties into a LLC for Asset protection. How complicated are they to maintain for a partnership (husband & wife)? Do you monthly give yourself a salary or at the end of the year just report your net profit or loss on your own income tax return? My CPA is trying to discourage me from forming a LLC because of tax complications and says if the LLC gets sued I could just be personally sued too. My lawyer says a S-Corp would be cheaper and do the same thing? Could someone please share their knowledge on the subject?
Thanks
Sam
I recently had a meeting of my account, attorney, and my mortgage broker all in the same room on that very subject. All had questions and concerns for each other as well as myself. The bottom line after 1.5 hours of discussion was to buy an umbrella policy to protect from liability. Taxwise I was the same and mortgages would be harder to get due to higher LTVs if I went to a sub-s corp or LLC. When I have more properties it will then payoff, but not now. I have 7 houses. I would like to know other thoughts on this subject as well.
I don’t know why your accountant would tell you there are tax complications with LLC’s because an LLC is a pass through entity. The income and expenses would pass through the LLC to your personnel 1040 income tax form. There shouldn’t be any tax ramifications with an LLC. The LLC is set up for liability protection, not tax protection.
I have a seperate LLC for each of my long term rental properties. The setup for LLC’s is very simple. At least in my state you fill out a one page Article of Orginization and then deed your rentals into the LLC and record.
If you are in California, I do hear that the LLC fees are high. But in my state it’s $75 for the setup and an annual fee of $15.
Mine is for 1 million. Check with the insurance companies as you can probably get more. If I get sued for more, the insurance company will fight it as they always do and they are good at that. Take precautions too. Check smoke detectors, inspect decks, etc. If you do not show any gross negligence you should be ok. A lot of people seem to be running scared and form LLC’s, sub-s, and everything else. Ask how many of all the investors had to actually rely on those entities to protect themselves. And then those that do, ask what the circumstances were. If it was the “mean landlords” fault then they deserve to hid behind something. Do a good business, and give your tennents a clean, comfortable place to live and I don’t think any judge will think otherwise. They are not fools. What do you think?