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| Re: LLC ownership |
| Posted by: REL |
| Date: July 12, 2005 05:28:45 AM |
| As MLR says, it is usually best to have a separate LLC for each property. The reason for this is that a large judgment against an LLC resulting from a claim against one property owned by the LLC would result in all other properties owned by the LLC being available for satisfaction of the judgment.
For example, assume that an LLC owns 5 separate properties, each having an equity of $100,000. Assume further that a serious injury or a death occurs on one property, the Court finds the owner liable, the jury awards the plaintiff $2,000,000, and the LLC has insurance of $1,000,000 that covers the matter. The defendent landlord (the LLC) will now be giving the total of $500,000 of equity for the 5 properties to the plaintiff. While other assets of the defendent may be safe (assuming everything was set up and operated properly), the defendent lost $500,000 rather than $100,000 as would have been the case if each property were in a separate LLC. |
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| Re: LLC ownership |
| Posted by: Ed |
| Date: July 18, 2005 02:36:07 AM |
| Jean - consult a tax attorney who can give you additional details. They will probably tell you what REL said plus a lot more. If you have substantial holdings, maintaining separate LLC's will be cheap compared to a devastating lawsuit. The cost to maintain the LLC's is less per year than the cost of the additional liability insurance IMO. I haven't gone the LLC route because my baloon insurance policy leaves me adequately insured, but if I had a substantial portfolio of properties, I'd go the LLC route. |
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| Re: LLC ownership |
| Posted by: REL |
| Date: July 18, 2005 10:18:02 AM |
| Landlords should understand that having a liability insurance policy, no matter how high the coverage, doesn't necessarily provide adequate protection in the event of a large judgment. All assets held in the name of landlord are at risk in the event of a judgment resulting from an event happening at any one property. Assets at risk include rental properties, personal residence, stocks & bonds, bank accounts, and all personal property of value (jewelry, furnishings, autos, boats, etc.).
As an example, assume that a landlord owns a personal residence having equity of $200,000, 3 rental properties having equities of $20,000, $150,000, and $500,000, respectively. The landlord also owns automobiles, stocks & bonds, household furnishings, and various bank accounts totaling $250,000. Assume that the landlord maintains insurance on each of the 4 pieces of real estate with liability coverages of $1,000,000 on each and has a $2,000,0000 umbrella policy. Assume also that all properties are held in joint tenancy of husband and wife.
Assume that the property having only $20,000 of equity is a recently purchased older SFR that has just been rented to a young brain surgeon and family while they await completion of their new home in an exclusive high-end subdivision.
Assume that the subject property has a defective heating system that leaks carbon monoxide and one cold night the entire family is overcome by CO poisoning. The wife and children recover fully, but the good doctor suffers from permanent brain damage that ends his career.
After several years of litigation a jury finds the landlord negligent in not properly maintaining the heating unit and awards the doctor and family $45,000,000 based on expected lifetime earnings of the doctor. The basic liability coverage of the property pays the tenants $1,000,000 and the umbrella policy even pays them the maximum of $2,000,000.
Accordingly, the landlord owes $42,000,000 and has assets of appoximately $1,500,000 net value including appreciation of assets during the years of litigation.
Most, if not all, of the landlords assets will be applied against the judgment and the landlord will have to file for bankruptcy in hopes avoiding the remaining $40,500,000 of the judgment taking everything he will ever earn during the rest of his life.
Now, had the landlord vested the $20,000 equity property in a properly structured and operated LLC, the loss would have been only $20,000 and the landlord and family would have gone on to become wealthy real estate investors.
While the example scenario makes a number of worst-case assumptions, the result is the way it could go under those assumptions. The bottom line is that maintaining a number of separate LLCs is not really very costly or troublesome. Once one creates the basic documentation or even pays and attorney to do so, it is simple to print another set of documentation when purchasing another property. The cost of maintaining each LLC is only $50 to $100 in most states. Each LLC requires the same tax forms, again a simple matter for even a novice computer user and of no extra cost.
Finally, as Ed recommended, I strongly advise that individual investors consult an attorney regarding the basic strategy, as there may be specific circumstances under which this is not the best approach to asset protection. |
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| Re: LLC ownership |
| Posted by: Carl |
| Date: July 26, 2006 11:54:23 PM |
| My wife and I are residents of California.
We are buying 2 properties (SFD-rentals) in Texas and plan on forming a Nevada LLC to hold title.
We understand we are subject to the various registration laws for a foreign corporation in Texas but are we subject to the minimum tax of $800.00 in California if we only use the LLC in Texas?
Now, after reading about multiple LLC's should we just form an LLC for each property in the state where the property is located? |
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| Re: LLC ownership |
| Posted by: Ralph |
| Date: July 27, 2006 01:29:34 AM |
| In general, one is only subject to fees and/or taxes related to an entity in the state where the entity is registered. Of course, this can mean more than one state when the entity is registered in one state and does business in other states, such as you are proposing to do (NV-TX). You will, of course, be liable in CA regarding income tax issues even though neither NV or TX have a personal income tax per se.
I do not see why you want to complicate life and increase cost by forming a NV LLC that must then be registered in TX. Why not simply form a TX LLC?
You do know, I hope, that optimum protection requires that each separate property be held by a separate LLC, meaning that all work (including tax returns) and costs are increased by involving multiple states. Additional work and cost results from multiple states if one wishes to have the property-owning LLC held in a holding company LLC, a tactic that can provide additional benefits. |
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| Re: LLC ownership |
| Posted by: Ed |
| Date: July 27, 2006 10:32:58 PM |
| Carl,
Keep in mind that CA takes the position that even though your LLC does no business in CA (hold Texas RE), that the LLC will have to file CA LLC returns because you are a CA resident that has some dealings with the TX LLC. This is based on a SBE case that just came down that involved a CA resident who was a member of an LLC that owned rental RE in MT with another investor in another state. The SBE said that even though the property was professionally managed by a third party in MT, that the CA resident still had to file an LLC return and pay the $800 annual franchise tax plus any LLC fees due as a result of the CA residents minimal activities (sounded like they wrote checks for the rental and accounted for the normal op.'s).
I'd suggest you consult a professional for structuring assistance so that you don't end up paying $800/year in franchise fees to CA for each LLC unless that is the way you want to structure your investment.
Also keep in mind that TX just changed their laws on the taxation of LLC's - goes into effect in a year or so. It probably won't affect you because of the small size of your LLC, but it should be considered.
Ed |
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