LLC or Umbrella Insurance, which is better?

Question

Hi,As the title says, I am wondering whether I should form a LLC company to protect my investment or use Umbrella Insurance. Here is my situation: we have W-2 work as our main income source and 1 primary home and 5 investment properties (all single family). We heard that it would be better to form a LLC company to hold the assets so that accident will not impact all assets. LLC can also have tax-saving benefits. We consulted with a CPA before and she just said that LLC can protect our assets but not that tax-saving. Having a LLC company is also costing money. Given that we only had 3 properties when we consulted with her, now we have more properties and I don't know whether this may have some impacts. Also, Biden's tax policy looks like that good for small LLC company....In addition, I heard that umbrella insurance could also protect rental properties. I didn't use this before and don't know whether buying umbrella could be better than forming a LLC. Hope I have make my question clear and any suggestions are welcome. BTW, any CPA professional who could help on this question is welcome to contact me~ I am in CA and investment in TX. ThanksJudy

Nathan Gesner · Answer

They are both beneficial, for different reasons.The LLC can provide anonymity and it separates your personal assets from your investments. However, someone would have to sue and win a pretty big settlement to take all your investments, so it's a real unlikely scenario and not worth worrying about.Umbrella insurance can protect all your assets, including personal. Again, someone would have to win a settlement so big that it would eat up your standard liability coverage and then go to the umbrella policy. That is extremely unlikely, which is why umbrella insurance is so cheap.I don't believe either is really necessary, but they are advised if you can afford them.

Becky Lai · Answer

@Judy WangAfter a lot of reading online I set up the umbrella bc it was pretty cheap ($1M=$305/yr, $2M=$534/yr and it led to savings on car insurance policies that offset the cost quite a bit) and I’m planning to set up LLCs this year. Here’s an article that explained the utility of each protection with examples. https://www.apartments.com/rental-manager/resources/article/umbrella-insurance-vs.-llc-the-best-option-for-your-rentalLLC is more expensive bc we’re in CA (compared to other states) but $800 and whatever extra tax prep fees seems relatively small considering the amount of assets it’s protecting. I personally think it’s worth the peace of mind.

Darius Ogloza · Answer

Sole member LLC's do not even get the benefit of an exemption from California tax withholding on the sale of property. Unless you have a group of investors, you really are buying very little when you set up a LLC in California.

Jared Friedman · Answer

@Anthony Vander MeerIf you reside in California you’ll be stuck paying an Annual $800 LLC tax for each LLC you own. If you own several properties and want them all in separate LLCs it will take a big bite out your investments. California residents get screwed on LLCs. An umbrella is a must. Even if you don’t own real estate just think about a lawsuit when you get in a car accident. Everyone should have an umbrella policy to cover their net worth. It’s super cheap and covers slip and falls and just about everything in between. As long as your not a slumlord and follow all laws and take care of your property and tenants than an LLC is really a false sense of security. Never heard of a single sole ever say an LLC protected them in a lawsuit when they had umbrella insurance. Insurance is layer #1 in a lawsuit. Load up on insurance. Its super cheap.

Anthony Vander Meer · Answer

@Judy WangI think it depends a little bit on what your W2 take home is, the higher the more protection you need. I do both the umbrella and the LLC but I have small MF’s. Besides the protection a LLC brings I like the fact that the property is not tied to my personal info. I’m all for risk mitigation. Consider the LLC will be a 1 time $1,000 cost and a umbrella will run you about $400-500 a year I think it’s a no brainer.

John Morgan · Answer

@Judy WangNeither. Just put them in your personal name and get a million in liability if you’re freaked out.

Judy Wang · Answer

Thank for all your reply. Really helpful! I would love to connect with CPA expert in real estate and know more!

Darius Ogloza · Answer

Buy the insurance. It is relatively cheap and provides you with solid protection against liability for all of your rentals that you list. You can choose several million in excess liability protection. An LLC's liability protection is not absolute. There are numerous reported cases of plaintiffs piercing the corporate veil, especially in the case of single owner entities.

Adam Martin · Answer

As Nathan said the likelihood a suit exceeding your general liability is rare but I still have an umbrella since it is 300/year and it makes me feel safer. I don’t understand why people say either or though as I personally think everyone should have an umbrella even in a llc to protect your asset so the real question is a llc on top of an umbrella necessary. I self manage so I assume any competent attorney would sue both the llc and me personally so I see no need for one.

Sakib J. · Answer

@Judy WangJudyYour story is exactly like mine. Any luck in getting answer to your question and on finding a good real estate tax expert who can save W2 income tax via rental ppty loss??Pls share or message me directly