Anyone who owns rental properties has probably thought about using an LLC to manage them. Property owners see this as a way to insulate themselves from liability, and to keep their business operations separate from their personal matters. These are two of the main advantages to starting an LLC. However, there are some disadvantages as well. Determining if an LLC is right for you will depend on your personal circumstances, and whether the pros outweigh the cons.
Protecting Your Assets
An LLC, by its very nature is intended to shield an owner from extensive personal liability. Owning and managing rental properties can be an unpredictable process. You never know when an event may occur on your property that could subject you to liability. Anyone in their right mind wants to make sure that a plaintiff will not be able to access personal assets to satisfy a judgment. In many jurisdictions, the presence of an LLC will prevent a plaintiff from seeking compensation from your personal assets.
Conflict is inevitable in the property business. Yet, the last thing you want is for an angry tenant to obtain your personal information for nefarious purposes. This is where an LLC can help. Keeping property in a holding company can mask the personal details of the owner. This allows you to keep your personal life private, and to make difficult economic decisions about the property without fearing recourse.
Unlike with a corporation, the income and gains earned by an LLC pass to the owner. The owner then pays for any tax due on his personal tax return. This provides a benefit because the LLC itself is not subject to taxation. Instead of having to pay taxes twice, an owner will only have to do so once.
Protection is Not 100%
Although an LLC is intended to protect your personal assets, it is not foolproof. In some scenarios, a plaintiff may still be able to reach your personal assets. An example is when you, or your partners, engage in some sort of wrongdoing. This can take the form of negligence, or a criminal act. In such a situation, a creditor or plaintiff may have a case against your personal assets.
If you have a mortgage, or other loans, when transitioning into an LLC, it could mean trouble at the bank. Some lenders will not be willing to accept the change of ownership. They may view the new LLC as a credit risk. As such, it is possible they will require the loan to be settled in full. This type of situation is usually accounted for in the contract’s due-on-sale clause. It’s a good idea to consult a business attorney before starting your LLC to see if you will be affected by this.
It is not cheap to start up an LLC. You will have to pay for the filing and registration fees as set by your state. You will also become immediately liable for the taxes associated with this business entity. This is not to mention the other costs that are commonly associated with a business.
If you need help with a business law issue, contact the business law attorney at Spencer and Jensen, PLLC.