WhyLLCs WHY EVERY LANDLORD CAN BENEFIT FROM USING A LLC The Limited Liability Company (LLC) is the best asset protection tool available to Landlords today. It is the second most popular tool I design for my clients after the Revocable Living Trust. The LLC provides greater asset protection than using most Land Trusts, better control over your assets than using Irrevocable Trusts, and more complete asset protection than using a Limited Partnership or Family Limited Partnership. The LLC does not have the same limitations as the S-Corporation and can have more favorable tax treatment than the S Corp. The LLC is what the Corporation should have been 100 years ago. What is an LLC? A Limited Liability Company is a general partnership and a corporation merged together. It is chartered like a corporation with articles of organization and a certificate of charter from the State Corporation Commission. However, its organizational documents that are signed after the charter is received are more like a general partnership agreement with "members" instead of partners. The "operating agreement" governs the activities of the members and will appoint one or more managing members to act on behalf of the LLC like a board of directors authorizes officers to act on behalf of a corporation. The LLC then functions more like a partnership than a corporation from that point on, skipping the board meeting minutes and corporate resolutions and three-step management so common in corporations. Single member LLCs are common, with the sole owner acting as managing member. How should I set up my LLC? Once you organize your LLC, you will want to place all of your rental properties in the LLC. This will protect your personal assets from liabilities created by virtue of your ownership of the rental properties. The LLC creates a "fire wall" around your rental properties which keeps any legal "fires" inside the LLC so they cannot get out and burn up your personal assets as well. The LLC, therefore, protects the assets you hold outside the LLC from the assets you put inside the LLC. What should I name my LLC? Many of my clients would like to name their LLC after themselves. I know that I would be proud to be the owner of Titus Properties, LLC. However, part of a good asset protection plan involves keeping things quiet. Privacy is important. You don't want to walk around with a target on your back. If it is difficult to find out who the true owner of an LLC is, it is more likely you won't be targeted in a lawsuit against your LLC. Pick a name that is not easily identified with you or your family. Many of my clients will accomplish privacy, while at the same time use a name that honors a deceased family member or friend, or a favorite pet. Should I use more than one LLC? You can use more than one LLC to further protect your assets. With each additional LLC you use, you are creating additional fire walls to protect rental properties from liabilities arising from other rental properties. So, the first LLC you create, should hold all of your rental properties so your home, your retirement, your savings, and your stocks and bonds are protected from all of your rental ownership liabilities. The second LLC you create should hold your more risky rentals so you protect your safer properties from the liabilities of the riskier properties. As you use additional LLCs, you should group your properties according to risk, until, if you desire, you end up with one LLC per property. Can I have too many LLCs? The practical side of owning one LLC per property is that it can become expensive and burdensome, especially for those who own more than five properties. Legally, the ideal asset protection plan would involve one LLC per property. But, most landlords with more than five properties will want to use two to five LLCs and then group their properties according to risk in order to minimize the chances of losing too much when a liability arises than insurance won't cover. Each LLC requires an annual fee to the State Corporation Commission and a separate tax return each year. Each LLC needs to have financial records for tax purposes. For some landlords, one LLC is enough, but others won't feel comfortable unless each property is in it's own LLC. It comes down to a matter of risk tolerance verses the cost of the protection. What about protecting my properties inside my LLC? The best way to protect your properties inside your LLC is the same way small businesses have been protecting shareholders of closely-held corporations for decades: keep little value inside the entity. It is not hard to run a corporation, where most of its hard assets are leased, and if it was sued for a considerable amount, it could be shut down without the shareholders losing much. Then the shareholders organize a new corporation, free of the lawsuit, and keep running the same business out of the new corporation. With rental property it is a bit different, because it is the ownership of the property itself that can create the greatest liability. You cannot lease your rental property to your LLC to accomplish protection of that asset. No matter how you set it up, there will be an owner and the owner will be subject to potential lawsuits based upon ownership. The only way to protect the properties inside the LLC from being taken from you, therefore, is to decrease the value of the asset itself by mortgaging the property. If you have one rental property inside your LLC worth $100,000 and you have no mortgage on the property, you stand to lose up to $100,000. If the same property inside your LLC has a $90,000 mortgage on it, you stand to only lose up to $10,000. If you choose to thus "strip" the equity from your property to devalue it for asset protection purposes, you can either use a commercial lender and take the cash out to invest it in stocks and bonds, pay off personal debt, purchase more rental properties, or utilize it any other way you choose, or you can use a private lender, including a controlled entity and hold the paper yourself. Either way, you have taken most of the value out of the LLC, and protected it from liabilities that arise inside the LLC. Ideally, you will strip all of the value from the properties inside your LLC so that you lose no value if your insurance doesn't cover the liability. You will not lose the property itself either, because it has no value, the judgment creditor will abandon it. Even if it is producing rental income, the income has to go to the mortgage holder(s) first, before it can go to a judgment holder. If the judgment holder is content to place a judgment lien on the property and wait till the rents pay down the mortgage(s) and create equity, foreclosure on the mortgages can erase the judgment lien. Complete asset protection is possible to achieve. Why settle for anything less? If you can use an LLC to protect all of your personal assets from all liabilities created by rental property ownership, and you can also protect all of your rental properties inside the LLC from ever being taken away from you, what are you waiting for? Click here to order your LLC.