LLC vs. Personal Name

[Account Closed]

hi, I am about to buy my first investment property. I'll be getting a mortgage on my personal name, however i am considering to put the actual ownership of the property on an LLC, will that give me any protection in a case someone wants to sue me ?

Also, shouldn't insurance cover all possible claims ?

thank you all in advance for your input

[Jerry W.]

The information you have is both right in its own way. First keep in mind in the podcast this was advice for folks with 8 to 10 million in assets. There is a reason for that. If you first rental property is several hundred thousand yes definitely form an LLC to start. In Wyoming the filing fee is $100 and a corporate book is about $80. I charge around $120 to file one. They are easy anyone can do it. What is important is you keep the corporate formalities. It must act like its own person. It has its own bank accounts, it has yearly meetings, it NEVER comingles money with others. Never buy yourself groceries or gas with it, never undercapitalize it, etc.

Another big thing that is never mentioned is that an LLC can never insulate you from a negligent act. If you have a property manager then why have a separate LLC to manage your properties? If you manage yourself and do a personal tort there is no protection because you can be held personally liable. let me give some examples. You have an LLC you drive company car and hit someone and injure them. You will be sued personally. If they win they go after your personal assets. If however you have a property manager and someone works on the furnace but messes up the vent pipe, and someone dies the corporation will be sued, as will the management company. As a shareholder you are not liable. If however you were the one who worked on the furnace and messed it up, you will be liable no matter how many LLCs you own. So small time owner operators only gain so much protection from LLCs. It is still a good idea to have an LLC, if someone slips on the sidewalk and sues they probably wont get past the LLC assets. Insurance is your best first line of defense. Then your LLC. On your first deal or 2 the cost of maintaining an LLC can greatly affect your profit margin. If your insurance is higher with an LLC, and you have to file your annual report, (in two states) you file a corporate income tax return, you have separate checking account costs, etc, and your profit margin is $100 per month you will not end up making much. If you have 5 properties making $100 a month each its time to have an LLC. Take the time to learn about corporate entities so you do not end up getting the corporate veil pierced. Hope this helped.