Questions on the mechanics of an LLC for a few SFHs

[Gordon Scott]

Hi All, hope this is the appropriate forum for these newbie questions

Quick background, my wife and I now have 3 SFH rental properties in California. There seems to be an active debate at my workplace as to whether small investors really need LLC's as opposed to having adequate insurance and umbrella policy to cover those. Currently we do have an umbrella policy, but I'm trying to do the research to see if an LLC is something to pursue or not.

There are a lot of discussions in the forums about the legal and tax implications but not so much about the details of operating an LLC and what to expect if we go that way. Legal and tax considerations aside, I have a couple of questions regarding the general mechanics and maintenance of an LLC.

1. 1. What happens to insurance when moving SFH into LLC? Can I add LLC as beneficiary to existing plan or do I need to cancel and create a new insurance plan for the LLC? Typically how different are rates for an LLC?
2. 2. My understanding is that California has yearly $800 fees for LLCs, so likely I would put my 3 properties into a single LLC as opposed to playing $2400 per year to maintain, Should I then look at an umbrella policy for the LLC to additionally cover all 3?
3. 3. I'm using a property management company and assume they would then start charging and paying the LLC rather than me personally. Are there any other things to be aware of when using a property management company in this regard?
4. 4. For any large maintenance projects, what is the 1099 process like? Realistically does it make it harder to find contractors to work with?

Thanks for any insights!

[Sergey Sidelnikov]

1. LLC may or may not better protect your personal assets if something happen with your tenants and / or with your properties.
2. If you'll decide to open an LLC, your rental properties will need to be transferred from your name to LLC which will cost you money.
3. Per my knowledge insurance rates don't depend of the type of ownership, but of the coverage and deductible. Call your insurance company to verify this information.
4. If you reside in California, regardless where you'll originate your LLC, you'll need to register your LLC with California Secretary of State and pay $800.00 tax per year. Put all your properties under LLC's ownership to save some money. You will be responsible to have federal and state tax return on your future LLC, plus Schedule K-1 (Form 1065) Partner's Share of Income which you will use for your personal yearly tax return.
5. New contract between your LLC as the owner of the properties and Property Management company will be required.
6. There will be no difference to find contractors to work on your properties if the property will be owned by LLC. If you'll pay your contractors via signed contract or just invoices, you won't need to worry about 1099, to confirm, talk to your CPA.