Questions around Trust, LLC, sole proprietorship, umbrella insurance

[Ana Vhan]

This is our situation. Let me know what is the right path for us - Trust and sole proprietorship OR trust and LLC OR something else?

We have rental homes in CA and in AZ. 

We plan to add all of those under our trust. Right now, for the liability coverage, we have an umbrella insurance in place. 

But we are wondering if we are better covered if we register an LLC and manage all the rentals under the LLC.

If we go the LLC route,

where do we register the LLC?

Can we have the homes under trust managed by the LLC?

With LLC in place, would we still need an umbrella insurance? I am guessing probably not but want to confirm.

With LLC we pay the $800 CA franchise fee every year, correct? We won't have to pay that with sole proprietorship.

Which route is better for us?

Thanks in advance. Always appreciate this community and the support I receive here. 

[Greg Scott]

Advice telling you what is better for you is best left to your CPA and attorney.

Personally, I have had umbrella insurance for many years. Not only does it protect me from liability at my properties, it also protects my property from liability I create.  Imagine you have cancelled your umbrella, then you learn you have not been maintaining your LLCs properly and get a lawsuit.  You better hope they don't blow through the property liability coverage.

[Katie Balatbat]

@Ana Vhan

There are several considerations that can go into the analysis of whether you need an LLC or whether a large insurance policy will suffice. Will depend on several factors like the type of property, type of tenants, your risk tolerance, other assets you own, your estate planning, laws where the property is located, etc. Same goes for number of LLCs and what to fund them with, since bear in mind that CA tends to be more cumbersome and expensive to have LLCs than other states.

California is generally more cumbersome than other states when it comes to taxes and filings. Even if you create a non-CA LLC, if you are managing the business from California, you will likely be deemed to be "doing business" in California and therefore likely subject to CA taxes. California charges a minimum tax of $800 a year per LLC, and more if you have gross receipts in excess of $250k. So, if you create an LLC in another state, you will likely need to register it as a foreign LLC in California. Though, this process will be the same for the other state (if you created a CA LLC you may need to register it as a foreign LLC in the state in which you are doing business/holding property). This means that you will probably need to pay registration and filing fees in at least 2 states if you don't buy CA property as a CA resident.

Any lawsuits should be limited to the assets of the LLC and not your personal assets (assuming you run the LLC appropriately and the corporate veil is not pierced, some debate as to SMLLC). But, an LLC will not limit you from liability in total. You can still lose your investment in the LLC. Or, a charging order may be granted. If you have a loan, you may wish to look into due-on-transfer clauses.

If you're going the umbrella insurance route, perhaps see if it will cover you for several things including just the routine slip and fall (like mold or earthquake). You'll also want to ensure you have a good property manager to look after the upkeep of the property if you are not there to notice anything deteriorating or which may need attention.

Creating an LLC in California could cost you a minimum tax of $800 every year. You would have ongoing filing requirements with the State and would need to keep business records and documentation. California does not recognize series LLCs.

You also want to look at whether a pass-through entity helps your bottom line and your taxes. There is a fairly new 20% pass through deduction you may qualify for that could help you, but not everyone qualifies. You should still be able to get this even if the properties are not in an LLC, if you qualify.

These are all things you will want to discuss with your attorney and CPA. If you need references for either of them in San Diego, let me know.

*This post does not create an attorney-client or CPA-Client relationship. The information contained in this post is not to be relied upon. Readers should seek professional advice.