Putting a rental property into an LLC (limited liability company) can be used to protect your assets from any liabilities that your investment might be vulnerable to in a possible suit.
So an LLC is only a legal business entity, meaning if you were to sue the LLC, in most cases, only the assets of the LLC will be the main topic of liability in that lawsuit. Personal assets like bank accounts and residences of the business owner are protected and can’t be touched. For instance, if someone were to get hurt on the property and sue for damages, they would have to sue the property owner, which is the LLC. Once doing so, they would only collect from assets that belong to the LLC, like business accounts, etc. So, the purpose of having an LLC incorporated into a rental property is to insulate any “personal” assets from the liabilities of the property itself.
Business owners who have multiple rentals want to know if they should form an LLC for every single property. But this is up to the client/business owner’s discretion. How much risk tolerance are you able to bear. Some feel it to be ok to leave these assets vulnerable, and if something were to happen, it would be left up to chance, and others don’t. Remember one thing: if there is one lawsuit regarding property under that LLC, all the other properties under that LLC will be at risk. However, if you have a separate LLC for every single property, one would not affect the other. More LLC(s) means more accounting and administrative work, but it will give you extra protection in the long run.
Another critical component is making sure the LLC owns the rental property. You can complete this action by a “Deed Transfer,” transferring the property to the LLC. Making sure that if there is a mortgage on the property, you are not activating an “acceleration clause,” which means paying the full amount of the mortgage upfront due to selling of the property. Most importantly, you need an LLC to operate as a business, so having a separate bank account to ensure all your renter’s checks in the landlord’s lease agreement is being paid in full to the LLC.
Enara Law specializes in the set up of LLC(s) and rental properties. If you have any further questions, please schedule a free consultation with us over the phone at (602) 687-2010 or email us at [email protected].