The Benefits of Organizing Your Rental
Property as a LLC; Can You Afford Not To?
(Published
in November 2003 issue of Apartment Owners Association of Los
Angeles Magazine)
By Michael K. Elson, Esq.
Generating income is the primary goal of any entrepreneur.
Equally important to businessmen and investors is the desire
to avoid personal financial liability for the obligations of
the business. The invention of the traditional corporation and
more modern business entities such as the Limited Liability
Company, have created a risk barrier which encourages business
ventures yet shields the owners’ personal assets from
seizure.
As a landlord, you are subject to virtually unlimited financial
liability and exposure arising out of the operation of your
rental property. Large lawsuit judgments against landlords are
becoming increasingly common. Without the protection of a Limited
Liability Company (LLC), your home, vehicles, bank accounts,
and other personal assets can be swept away.
Reorganizing your rental property into a LLC can eliminate
this risk to your personal assets. A properly formed LLC is
a separate and distinct business entity with its own taxpayer
identification number. The LLC, rather than the landlord, becomes
the owner of the individual rental property. In much the same
way as shareholders of a corporation are protected from liability,
a LLC will provide limited liability to its owner(s) and shield
their personal assets. Should the owner(s) wish to manage the
LLC’s daily operations, either in full or in part, they
will be legally classified as employees of the LLC. Therefore,
the maximum financial exposure to the owner(s) of the LLC, including
exposure from acts of its employees, is limited to the individual
property held by the LLC, and nothing else.
Once your attorney completes and files the array of legal documents
required for the initial formation of your LLC, you will no
longer be personally liable for any debts or judgments against
the LLC. Utilizing the LLC eliminates the double taxation and
extensive formalities associated with a traditional corporation.
Perhaps the most obvious changes are that lease agreements are
between the LLC and the tenant, rent checks are made payable
to the LLC, and when evictions are instituted, it is the LLC
that is evicting the tenant, thus eliminating the appearance
that you are personally seeking the eviction.
The State of California requires the LLC to pay an annual $800
franchise tax fee, the same as a regular corporation or limited
partnership. This fee, however, can be viewed as a yearly "insurance"
premium, which provides vastly more protection than private
insurance with an equivalent premium amount. The beneficial
result is that the maximum financial exposure to the owner(s)
of the LLC, including liability from acts of its employees,
is limited to the individual property held in the LLC, and nothing
else. Lastly, the critical transfer of the property to the LLC
is almost always exempt from property tax reassesment. The attorney
preparing the LLC will execute the proper paperwork to assure
this exemption.
In today’s legal environment, successful tenant lawsuits
against landlords are becoming more frequent. Additionally,
insurance no longer provides adequate protection to the property
owner(s). Most insurance policies contain exclusions for mold,
discrimination claims, and lead-based paint. Even with insurance,
a building fire or balcony collapse resulting in numerous claims
could create a liability far exceeding your policy amount. Without
the protection of a LLC, your personal assets can be taken from
you, potentially leaving you destitute and bankrupt. Given all
of the advantages of the LLC, not to mention the piece of mind
it brings to its owner(s), it is foolish to not utilize this
most valuable business invention. A typical LLC can be organized
by an LLC specialist attorney for a very modest cost, bringing
you, your family or your investors the protection you and they
so rightfully deserve.
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