Best way to setup purchasing new properties/legal protection
If you’re an owner of one or more investment properties, it’s important to set up your investments in the proper legal context to protect yourself and get the most from your properties. However, depending on your situation, you have a number of options to choose from that can have a profound impact in terms of your legal liability. This article will provide some tips to follow that should help you better understand your investment property legal options.
Protect Your Assets
No matter how much property you own, you’ll likely want to purchase landlord insurance and an umbrella policy. Buying these is a good option for those who own just a few properties, offering solid but sometimes limited protection. In most cases, a good insurance policy is your first line of defense.
However, the question often arises as to whether you should set up your properties under a Limited Liability Corporation (LLC). If so, should you place them under different LLCs?
Usually, if you have substantial personal assets, then you should think about setting up an LLC. However, there are serious questions to address first about the pros and cons of an LLC before you decide on this option.
Pros of an LLC
For those with multiple properties, an LLC often makes sense, given its ability to shield your personal assets from litigation from tenants and other parties. Some recommend multiple LLCs that cover different property portfolios as well. There are some benefits to this strategy, as it does have the potential to shield your different properties better if you are threatened with a lawsuit. Each property or portfolio of properties are safe in the firewall of each LLC.
If you are hit with a multi-million dollar lawsuit due to negligence on your part or your tenants’ part, liability insurance sometimes will only cover so much. However, with properties under different LLCs, these and your other assets will likely be protected in case of a substantial legal problem.
LLCs also allow you to benefit from “pass-through” taxation, which generally allows you to be taxed at a lower rate and avoid double taxation. If you’re concerned about keeping your name private, an LLC will help shield you in this regard, since your real estate portfolio is tied to the name of the LLC.
Cons of LLCs and Using Multiple LLCs
However, LLCs do have some significant drawbacks, especially with regard to multiple LLCs that cover different properties. Often, if you try to hold different real estate properties in shell LLCs with no additional cash or assets, you can be disqualified from the benefits of liability protection under an LLC. Essentially, with multiple LLCs, it’s likely that you would need liquidity in each LLC you own, creating potential headaches for you in the long run.
In addition, you will have to file tax returns for each LLC as well as an annual renewal fee, which can quickly add up in terms of costs. For this reason, multiple LLCs are usually more common for property owners who have very large portfolios, where it makes more sense to pursue this strategy.
It’s important to remember that an umbrella insurance policy can be applied to one LLC, which protects only that LLC. With multiple LLCs, you will likely have to purchase an additional umbrella protection policy for each individual one, which can raise your costs quickly.
Ultimately, multiple LLCs will require a qualified CPA to take care of your accounting, as these issues can become quite complex when filing returns.
Seek Outside Help
While there are legal services online that can help you fill out forms and build certain legal structures around your investment properties, it’s usually a good idea to speak with a qualified and experienced attorney or CPA before you decide how to set up your investments, especially if you own multiple properties. They can give you further advice on how to proceed and help you protect both yourself and your property.
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