It really depends on your personal situation and comfort level.
First off, what is an LLC? An LLC stands for Limited Liability Company and is an entity that separates business owners and their assets from their business. When a person operates a business (rental properties) without separating themselves from the business, they essentially put themselves in a situation of unlimited liability.
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If anything goes wrong (tenant gets hurt or you are sued personally) the business owner’s personal assets could be targeted in a lawsuit to award damages to the Plaintiff. But by creating a LLC, the business owner protect themselves from the threat of lawsuits, debts, and other damages.
Back to the question do you need an LLC, my recommendation is you first need to review your own situation and decide on your personal liability. For my family, there are two reasons on why we decided to created several LLC’s. The first reason is obviously “Liability” and second and even more important is “Inheritance” for my family.
I’ll start with inheritance first since it is the foundation of how my wife and I structured our business entities. My wife and I do not own anything in our name except for our personal checking accounts for day-to-day purchases. Seriously nothing!! Instead, everything that we technically own is actually legally owned by our family revocable trust that in turn owns all our assets in LLC companies. For example, our family trust owns a Holding LLC that was formed in WY and that holding LLC then owns LLC’s that were formed in the state of where our rental property is located. Side note, the reason for the Wyoming holding companies is when forming/file your LLC with WY, the member and mangers names of that LLC are never on public record. That’s ultimate privacy on the ownership of your assets.
I know this sounds complicated but the reason for this chain of ownerships through our trust and LLC’s is to avoid having to change individual ownership on our assets when life changing events happen. Why is this important you may ask? If I were to die then nothing changes on ownership of our assets but instead my wife becomes sole beneficiary of all our assets through our trust. If both my wife and I die, my kids become beneficiaries of the trust and all the assets easily pass to them. To better explain this, none of our rental property’s deeds or other assets would need to be changed/filed to move ownership to our kids if we died since everything is owned by our Trust. Also, the additional benefits is the trust has clear guidance that explains how to manage our assets if our kids are still minors. This is peace of mind for my wife and I to know that our kids are taken care of if we were to pass.
Now let’s talk about Liability. There are 2 ways to think about this when you are trying to protect your assets. One way is the asset itself – what if your tenant gets hurt on your property and they want to sue the property owner. If the property is in the owner’s name then that means all assets the owner has are up for grabs. If the property is owned by an LLC then only the assets that LLC owns are liable. The second way to think about Liability is if you are sued personally for any reason. Everything that you own under your name could now be awarded as compensation in the lawsuit. When your assets are owned by LLC’s, then you are better protected on not having to liquidate those assets owned by the LLC if you lost the lawsuit.
Going back to using a Holding LLC in WY, this is an added layer of protection because it is hard for the so called “ambulance chasing” lawyers to figure out how many assets you have. To the lawyer, if you look like you have no assets or those assets are owned by LLC’s they may not take the lawsuit since you are not an easy mark. Additional the LLC provide protection by the privacy since ownership is hard to identify.
I’ve probably convinced you for the need for LLC’s because of liability protection and inheritance but this does come at a cost. It is fairly easy and cheap to go online and create an LLC but I caution against doing that unless you fully understand what you are doing. If you do not create the LLC correctly than you might not actually have the liability protection you thought you did which defeats the purpose. I recommend instead that you discuss your personal situation with an asset protection lawyer who specialize in this even though it may be costly. The other cost to LLCs are the filing fee with the state you form the LLC in. Those cost can be different in each state and usually includes a yearly reoccurring cost. Also, you will need to pay for a registered agent in the state the LLC is formed. These costs can also range but they are a person or entity that is designated to receive mail for that LLC. Once the LLC is created there will be more fees to the county clerk to change the ownership of the deed of the rental property. Finally, with every new LLC you create the process of preparing taxes becomes more complicated. Even though the LLC may be a pass-through entity, and even if there is no money coming in or going out, you will still need to prepare K-1 that will be filed with your personal tax returns as part of your schedule C.
If you have any additional questions, please email me directly at James@jcoreinvestments.com