LLC for just a few Rentals or Better Insurance?

Question

If you have just a few rental properties is iy worth having an LLC for each or fo i just up ky insurance. My acvountant always tells my accounting for doing taxes will get way more complicated (more money)

Michael Norris · Answer

An LLC is not a substitute for quality insurance it just adds an extra layer of protection and the possibility of tax benefits as well as some privacy.

That said an LLC is not bullet proof. If you have a liability claim situation and the attorney for the other side is taking a negligence angle against you there is a possibility they can pierce the LLC and come after you personally above and beyond what your insurance policy pays out which is why having a quality insurance policy up front is the best defense.

Scott Smith · Answer

Hey Mike,

It really just comes down to each investor's situation. I always keep each of my investments separated, but there are also asset protection structures like the Series LLC which is meant to scale and grow with you. When I sit down with clients I will always discuss (1) their personal assets, (2) what their current investments portfolio and other business ventures before discussing (3) their future goals. Each of these variables will dramatically change the advice I give the individual asking me this question. I often break it down into the "five pillars" of protecting your assets. The first pillar is avoiding unnecessary and risky activities (don't drink and drive, insurance generally won’t cover your poor decisions) and take good care of your investments - these simple steps will help you prevent lawsuits before they even occur. The second pillar is a good insurance policy as that cover the majority of your exposure. However, it only protects you from one type of liability: accidents.

After that you want to compartmentalize your assets, which is often accomplished through the use of LLCs or corporations. I personally find the Series LLC to be a great tool for the individual investor who is planning to expand their operation, as it allows for you to scale infinitely - check out this article to learn more. The fourth pillar is somewhat similar - you want to separate your operations from your assets. That means you establish a Traditional LLC to carry out the operations of your investments, in order to separate the liability from your assets, including: paying property management, paying contractors, collecting rent, marketing, etc. Finally, with the use of Trusts while establishing these structures you can add a level of anonymity by removing your name from public record.

I would encourage you to meet with an experienced attorney who can explain to you the risk you are running and walk you through your options. Once you see your exposure, then you can choose how many "pillars" to add to your own strategy. I made the decision a long time ago to hedge my investments pretty heavily because I cut my teeth in the legal field by litigating major insurance companies on claims they refused to pay out - it isn't a common thing, but it does happen more than people expect. It's up to each investor what that safety net is worth to them once they can see how far they can fall without those supportive "pillars."

Feel free to shoot me any messages if you have more questions. This isn't legal advice, just my opinion as a real estate investor.

Simon W. · Answer

I vote LLC for each property.

LLC for just a few Rentals or Better Insurance?

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