In my previous post, I spoke of the potential risks involved in real estate investment – namely, the risk that your personal assets are vulnerable should you be sued by a tenant or property guest. There are measures you can take to prevent such a scenario from playing out.
The LLC (Limited Liability Company) is a popular asset protection vehicle for real estate investors. It essentially forms a wall that shields individual owners from personal liability. In addition to this personal liability protection, the LLC can also offer tax advantages and other benefits.
So what is an LLC? It’s a hybrid of a partnership and corporation. It’s considered to be a “Separate Legal Entity.” In fact, a properly formed and maintained LLC will have both a state-certified filing date and an IRS-issued Tax ID Number (similar to an individual’s birth date and social security number).
The following example illustrates the LLC’s liability protection. Let’s say you have XYZ LLC that holds title to a vacation rental property. A guest falls from the balcony and the court awards a multi-million dollar judgment to the plaintiff. The defendant in this case is XYZ LLC, not you. And the judgment can be collected only from XYZ LLC’s assets, and not from your own personal assets. You may end up losing your investment in the property owned by XYZ LLC, but your other properties, your savings account, and any other investments are all safe.
Setting up an LLC is a relatively easy task. You can either contact your attorney or use a legal document filing service to file the necessary forms with your state’s Secretary of State.
Of course, once you have established an LLC, your work isn’t done. You’ll need to sign a deed transferring the property to the LLC, and then record the deed in the county where the property is located. This may sound like an obvious step, but do not overlook it. If you never actually deed the property to the LLC, you (as an individual) are still considered the owner and will be the defendant in any lawsuit.
Take your legal filings seriously. The old adage is true: an ounce of prevention is worth a pound of cure.