March 27, 2015

Protect Your Personal Assets When You Have Investment Properties


Limited Liability Companies and Investment Properties

Limited Liability Companies (LLCs) are a relatively new and increasingly popular method of forming a business. They balance the benefits of limited liability provided by corporate entities with the ease of operation generally found in a partnership. In terms of real estate investments, titling your property in the LLC rather than in your own personal name can provide a separation between your personal assets and those of the LLC in case of any unfortunate events (lawsuits). Here’s the situation:

You hold an investment property that you rent out weekly for beach going vacationers. Said vacationers decide to have a party and one of the guests manages to fall off the deck. The guest files a lawsuit and names the owner of the property in the action. Should the property be titled in the owner’s name individually, the owner would have to protect not only their investment but also their own personal assets against any lawsuit and resulting judgment. Should the property be held by a properly formed and operated LLC, most likely only the assets of the LLC (the investment property itself) would be at risk. However, please be aware that failure to follow your operating agreement and maintain formalities between yourself and your business could result in a court being unwilling to provide you with the liability limitation.

Consequently, the benefit of the LLC lies in the separation of personal assets and the investment property. While your liability insurance coverage should offer some protection against any incidents, insurance policies have both limits and exceptions.  Ultimately, owners who properly manage their LLC and follow the statutory corporate formalities provide themselves with a layer of protection unavailable to those with investments titled in their individual names. As always, please construe this article as information only rather than legal advice. You should consult your attorney and CPA when you decide to start an LLC, not only in order to tailor the operating agreement of the LLC to your personal needs but moreover to ensure that the LLC is the right structure for holding your own or your client’s investment property.

Disclaimer –This information is not to be construed as legal advice and is for informational purposes only. This information is not intended to create an attorney client relationship or to advise on any specific legal situation. Specific laws vary from state to state and for legal advice on a specific matter, consult an attorney.