How Does an LLC Protect You?
by Christopher Levarek
“Are brains are either our greatest assets or our greatest liabilities”
- Robert Kiyosaki
I remember the first time I thought of getting an LLC. I’d heard they were pretty important for owning real estate properties, so I jumped online looking for options. Rocketlawyer or Legalzoom offered the best rates, so I played around until I had my first very affordable LLC. I was off to the races!
This might sound familiar to you, as this is exactly how most people get into creating an LLC. Yet, truth be told, LLCs aren’t even needed for most people. You do not want to pick the cheapest or easiest option in this case. Today I’m jumping into why you should create an LLC, how to go about it, and if it’s really even needed. Let’s jump in.
Why do you need an LLC?
An LLC is really just an entity with a name that has a taxable ID, an EIN. So it’s like a person, but it’s a structure or entity. The LLC can thus file taxes and own things. By placing a real estate property into an LLC or having the LLC "own" the property, a person can separate their personal affairs from their LLC. This has a few benefits.
First, if anything goes wrong with the property, as in a lawsuit from a tenant, only the value of the LLC can be involved. So a person has protection from losing any other properties or affairs in a lawsuit.
Two, having an LLC can allow a person to have bank accounts, mortgage loans, and any other "business-type operations in the name of the LLC. This really has an organizational benefit and is good for records.
Three, creating an LLC is very useful for creating a partnership with another investor. It allows a person to put all the partnership terms on paper and thus have a record as well as a plan for the business venture.
That’s really the highest level of why an LLC makes sense. So how should you make one?
How do I make an LLC?
An LLC is quite simple to start. Really, you can go about it multiple ways, but here are the common ones.
First, you can find many resources online that will help you draft up an LLC. LegalZoom and RocketLawyer, as mentioned, make it all easy and able to be done from behind the keyboard. Enter the details when prompted in the fields and hit submit.
Two, consulting an attorney focused on LLCs or entity creation is one of the best methods. There are attorney offices that build LLCs, S-Corps, trusts, and the like day in and day out. They are often the best way to go about it, as they will help you draft up custom entities for your exact needs and guide you on what’s needed.
Third, you can simply file the paperwork yourself with the county. The county has paperwork that will allow you to create an LLC all by yourself. Just go to your online county page or visit the office in person and receive guidance on how you can do it yourself.
In either case, all that is needed to start is an LLC name, the names of the managers and members who will be in the LLC, and the state you will have the LLC in. That’s it!
Ok, but do I really need one?
The answer here, of course, is that it depends. As mentioned, an LLC provides liability protection and organizational benefits. Yet it is not always needed. A person can just as easily have an umbrella insurance policy that covers any such liability risks in real estate. The policy would kick in if a lawsuit happened, and thus your affairs would still be protected.
Let me put it simply: If you have 1-2 properties or this is your first property, You do not need an LLC. It will typically cost more and complicate the process for you. An LLC needs taxes to be filed and annual maintenance.
If you do get one, remember that you can have multiple properties in an LLC. There is no need to get an LLC per property. The only reason you would put an LLC per property is for organizational reasons or because each property has a significant amount of equity and you want to limit the amount of potential liability per property.
My suggestion is this: Keep it simple on your first property. You can always get an LLC later and move the property into it if needed. Use the umbrella policy. Happy Investing!