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, your exposure is unlimited
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.
How the LLC changes that
Reorganizing your rental property into an 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, an 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 in the LLC, and nothing else.
Everyday operating changes
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.
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 — eliminating the appearance that you are personally seeking the eviction.
The $800 franchise tax is insurance
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.
Where ordinary insurance falls short
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 an LLC, your personal assets can be taken from you, potentially leaving you destitute and bankrupt. A typical LLC can be organized by an LLC attorney specialist for a very modest cost, bringing you, your family, or your investors the protection you rightfully deserve.