An affordable and highly effective method of protecting your assets from attack is to transfer your rental property to a joint stock company (LLC). Owning investment property through an LLC limits the Company's liabilities to only the assets contained in the LLC. In the same way that the shareholders of a company are protected from liability, a properly formed LLC will protect its owners from litigation liability, including liability from actions of its employees and agents.

There are several significant benefits that California LLC can provide to you or your investors. LLC creates a risk barrier that encourages apartment ownership, yet protects the owner's personal assets from litigation and seizure. Double taxation and extensive formalities associated with traditional businesses are eliminated. When legal action is required such as an eviction against a tenant, it is the LLC rather than the individual owner who pursues the claim. In addition, the landlord's privacy is improved because rental checks are paid to the LLC, rental agreements are between the LLC and the tenant, and correspondence comes from the LLC.

Although high limit liability insurance is important, it is still not sufficient to protect property (s) from loss of assets. Most insurance policies include exceptions for mold, lead-based paints and other environmental hazards. In addition, they rarely cover judgments due to claims of discrimination. Even with expensive high-limit insurance coverage, a major incident such as a fire or balcony collapse, resulting in numerous damages, can create liability far beyond your policy limit. Even with the best of intentions about your tenants, the LLC has become a necessary tool to limit liability not only for legitimate claims, but also for those where only a brainwashed jury could see profit. The deductible $ 800 annual state franchise tax on LLCs is small compared to the huge benefit provided.

In recent years, the state of Nevada LLC has been proclaimed as an asset protection alternative to California LLC, as the annual tax is relatively small compared to California. However, in most cases, there is little or no financial benefit to forming a Nevada LLC for your rental property in California because ownership of California property necessarily means that business is conducted in California. As such, Nevada LLC must also be registered with the California Secretary of State and pay the initial California registration fee and $ 800 annual franchise tax along with California income tax. (Approx. Rev. and Tax Code sec. 17941, Approx. Corp. code sec. 17050). For businesses other than California real estate where the principal business is not traded in California, Nevada LLC / Corporation may be an attractive option for investors.

Additional benefits of LLC include the ability of LLCs to take advantage of 1031 exchanges and the exemption of 3 1/3 lien on the sale of real estate to multiple member LLCs. In addition, a separate federal tax return is usually not required for LLCs with a member, including those owned by a husband-wife or a living trust, and the property transfer to the LLC is almost always exempt from tax assessment. And the LLC will work very well with a living trust to simultaneously protect and preserve real estate assets.

Many tenants have executed a living trust to ensure the distribution of their assets after they die, as well as to avoid huge replacement costs, reduce or eliminate property taxes when they die, and prevent judicial review of their assets if they become incapacitated. However, living trust does not protect against lawsuits. If an apartment building is owned directly by a living trust, all other assets in the trust will be subject to litigation obligations generated by the building. A much better approach is to place your apartment in an LLC, creating a barrier of responsibility to protect all the other trust assets. The LLC member interests can then be safely added to the trust.

As far as multiple investments are concerned, it is better to have a separate LLC for each rental property so that liability arising from one property cannot be linked to other properties. Even single-family homes with tenants should be owned by their own LLC. If paying $ 800 annually each for multiple LLCs is not a viable option, properties can be grouped together. Owning a total of six investment properties with three in one LLC and three in the other would provide significantly more protection than owning all the properties in one's personal name.

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Before deciding whether filing an LLC is right for your specific situation, you will need to learn about some of the benefits, risks and requirements that will affect you and your business. Here are some of the benefits of forming an LLC.