@Pradeep Velugubantla I'll preface this with the fact that I have a legal background, specifically with estate planning and asset protection. However, this is not specific legal advice to you, just an opinion based on the circumstances described.
Do I Need LLC?
Short answer is no, you don't need it. A better question is "Should I have a rental property in an LLC?", the answer there (to me) is Yes. I would never own rental properties in my personal name. Yes, there are many out there that do it and nothing bad has ever happened, and I say kudos to that, I just would never do that. Second, in terms of asset protection, LLCs are not invincible, but I think what many don't understand is that they are not designed to completely shield your assets from liabilities, on the contrary they are designed to contain and isolate liabilities. They keep inside liabilities inside and outside liabilities outside. Read that again. The reason you see a person’s name and all their entities listed in a lawsuit is because Plaintiff (the suing party) attorneys have to list everyone and every entity that can be remotely tied to a cause of action, otherwise, if enough time passes and through the legal process discover that a separate entity or just a person was truly liable and they didn’t name them in the lawsuit, they are out of luck. Basically, they name everyone because they’re hoping and counting on the fact that people set up their own LLCs and didn’t adhere to basic entity maintenance and kept things separate (like bookkeeping and separate bank accounts).
Location of LLC?
Typically, we set up entities in the state in which the property resides. The reason is that one wants to be able to properly avail themselves to the laws and protection of the corresponding state where the property lies. If a person owns a rental property in PA and if something happens on that property, the cause of action (lawsuit) would go before a court in PA, with a PA judge, citing PA law. Therefore, one would want a PA LLC to have title to that property.
Transfer from personal name to LLC/Due On Sale Clause
If one is transferring property title from personal name, a Grant/Warranty Deed would be drafted/recorded to transfer title. NOT a Quitclaim Deed, because Quitclaim Deeds do not fully warrant the rights and covenants of property as does a Grant and/or Warranty (or equivalent depending on state) does. Most purposes that people on the BP forums are transferring properties to an LLC, would be exempt of the Due On Sale Clause. There is statutory, and now Fannie/Freddie guidelines, that exempt many transfers from being subject to the Due On Sale Clause...asset protection/estate planning purposes are typically covered.
Why Use LLC when an Umbrella Policy Does the Same?
Umbrella Policies are good, but they are not an asset protection tool, they only cover litigation/damages after you’re already in litigation or found personally liable. Also, most Umbrella Policies only pay out if your underlying policy pays out, and the underlying policy will do everything they can to find an exclusion or that you were negligent (which you probably were) in the cause of action to get out of paying the claim. And yes, attorneys make money from forming LLCs, but they make way more when you were negligent and didn’t know what you didn’t know and end up in a lawsuit.
