LLC

[Sassy Dlynn]

My Husband and I own 3 houses and two of them are rentals. He wants me to put the rentals under an LLC. Now I know an LLC is to protect you in the event of being suid, but if we have good insurance polocies, does that matter. I just don't understand why he wants me to bother with the LLC? Please help. Oh, and we don't own anything realy for anyone to take, all three properties have notes with the bank.

[Brian Burke]

Allow me to outline a different perspective from the majority. I don't know the specifics of your financial position, but let create an example based on what I do know:

1. Personal residence worth $100,000, has $70,000 mortgage, $30,000 equity
2. Rental #1 worth $100,000, has $75,000 mortgage, $25,000 equity
3. Rental #2 worth $100,000, has $75,000 mortgage, $25,000 equity
4. No other significant assets, $80,000 net worth comprised primarily of RE equity
5. You have insurance on all your properties and a $2 million umbrella policy

Now consider your exposure. Your primary concern is being sued by a tenant, passerby, or worker. before they sue you, their attorney will research your assets to decide if suing you is worth $30K+ in legal fees. If the above example describes you, it might not be worth it.

Your most certain exposure is the legal fees to defend the suit, and LLC or not, you're stuck with the legal fees. Your insurance carrier will pay for your legal defense if you are properly insured, LLC or no LLC.

Your POSSIBLE exposure is from a judgment. I say "possible" because just getting sued doesn't mean that the plaintiff will win (but you have legal fees win or lose). Let's examine two scenarios. One: the plaintiff gets a $2 million judgment. Your $50k equity in the rentals is at risk, your house might be safe because of a homestead exemption. The "unspoken" factor here is that the plaintiff's attorney is going to settle with your insurer within the policy limits, because reaching higher than that isn't worth it.

Scenario two: you get hit with a $5K judgment in small claims court. Your net worth is worth pursuing in this case, but your insurance should respond. Even if you have to pay a $5K judgment out of pocket, it's cheaper than paying the cost of an LLC for just a couple of years. And lets not forget, even if you have an LLC, you arent exempt from that judgment...your LLC will have to pay it (if you have no insurance), the LLC just means they cant tap your personal assets, which as you say, are limited anyway. LLC costs: Most states charge an annual fee, plus you can't forget the cost of preparing the LLC's tax return and other misc costs.

The bottom line is that LLCs are great if you own a lot of property, have a lot of exposure, and a lot of personal net worth to protect. They are just overkill in some situations so they are not for everyone. Good insurance with high limits IS for everyone.

Over 20 years in this business, hundreds of rental units, and never hit with a judgment. Been sued, but never lost. Plenty of legal fees paid by insurance. That's my experience, your mileage may vary.