Is changing ownership to an LLC really worth it?

Question

I recently purchased a Duplex in Ohio with my mentor. We purchased it in our individual names and are trying to decide if transferring the deed to an LLC is worth it. I was under the impression that an LLC protects you from tenants suing you and also from the mortgage company if you couldn't pay the mortgage.

After speaking with a lawyer over the phone he told me that the mortgage company could still go after us personally if we couldn't pay the mortgage. He also gave the impression that if ownership is transferred to an LLC, home insurance company could raise the premium. And the mortgage lender could set a higher interest rate.

I’m starting to think an LLC isn’t worth it and will create a mess. I’m wondering if I should leave things alone or transfer the deed into an LLC? I also wonder if the mortgage itself should be transferred as well? If I were to go forward with it, I would do an Ohio LLC because a CA LLC is too expensive.

Appreciate the response.

Jason Marino · Answer

Hi Michael,

An LLC can provide you with limited liability protection if it is created and maintained in the right way. It would protect your personal assets from liabilities that occurred at the property in a way that is not possible if the property is in your name. As you said in your post, this protection would not cover you in situation with a lender that wants to foreclose on the property. I cannot speak as to how the insurance and the mortgage would be affected, but you should confirm with the mortgage company that the transfer to the LLC will not create a due on sale clause violation. In relation to the State that the LLC is from, you are going to usually need an LLC from a State where the property is located, or an LLC registered to do business where the property is located. The reason for this is that an LLC owning property is generally considered to be doing business in the State where it owns property. In relation to California being too expensive, my understanding is that you, as a California resident, will be required by the State to pay the minimum annual franchise tax of $800.00 on any LLC that you own regardless of the LLC being from another State outside of California.

Katie Balatbat · Answer

@Michael Anderson

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'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.

Chris Seveney · Answer

@Michael Anderson

1. You can be sued by anyone- that is why people get insurance policies

2. You are NEVER protected from a lender unless it’s a non recourse loan. Even if it’s in your LLC they can still go after you as most likely you signed a personal guarantee on the loan

If the loan is already in your name then you are already personally guaranteeing it - transfer property to LLC does not transfer the loan.

Justin Brickman · Answer

If you're making your monthly payments, a mortgage company will most likely not care if you execute a warranty deed. As long as you pay on time, you don't have to worry about any acceleration clause.

Michael A. · Answer

Hi Katie. I asked my CPA in Huntington Beach, CA. He told me that if I create an Ohio LLC I would not have to pay the $800 California tax. It seems like everyone has a different answer but this is what my cpa told me.

Is changing ownership to an LLC really worth it?

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