Are LLC’s a Safe Bet?
If you are an investor dealing with rental properties, liability concerns are a factor that must always be taken into consideration. The possibility of tenants hurting themselves is real, and if proper measures are not taken, a landlord may be held accountable for any injuries they suffer from. Many investors choose to form a company in which they will purchase investment properties, and there are many different options available.
In the United States, there is the option of establishing a Limited Liability Company, (LLC) which serves to protect unrelated assets, among many other uses. When an investor owns a property through an LLC, the property is tied to the name of the LLC, rather than the name of the investor. An LLC therefore provides limited liability to the name-holders, and can serve as a sort of security blanket to investors that own rental property.
It is common knowledge among investors—protect your personal assets. An LLC owner is considered a separate entity from the LLC, even if he/she is the sole member. If an LLC owes debts or claims for bankruptcy, creditors cannot go after the owner of the LLC or any of their unrelated assets. The debt and bankruptcy is in the name of the LLC, not the founding member(s).
Furthermore, establishing an LLC to protect against possible personal injury lawsuits is a great advantage to landlords. If a tenant or any guest is injured in a rental home, the owner of the rental home may be held responsible for all bills accrued due to personal injury—even if they have an insurance policy. Not all insurance policies are equal!
Contrary to a corporation, an LLC can be easily managed and is not required to be double taxed on income. An LLC also does not require an officer list or board of directors like a corporation, and can be run by a single member. Meaning, the owner of an LLC does not have to pay taxes on both the rental income and the appreciation value of the home every year.
One of the biggest advantages of a property owned by an LLC is that the law will protect an investor from having unrelated funds accessed by plaintiffs suing for monetary damages. Establishing a business entity as an LLC can be complicated, so due diligence is important to ensure no laws are broken, and all possible advantages are addressed.