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Why Establishing an LLC is a Good Idea for Real Estate Investors

One of the most common reasons persons establish a limited liability company, or LLC, is to create a level of protection and separation from the business owner and the business itself.  In other words, an LLC is established to protect an individual’s personal assets and risk-management.

As people today are willing to file a lawsuit over the most ridiculous things at the drop of a hat, it is even more important than ever to protect real estate assets with an LLC.

Real estate is a magnet for lawsuits.  First, real estate is an asset that can be used to satisfy any judgment a prospective Plaintiff may win. Second, as the property owner, the law looks to you to ensure that the property is safe for everyone that comes on the property; and if someone gets injured, regardless of fault, the property owner is going to be a target to compensate for the injured party’s damages.

Despite these risks, real estate continues, and will continue, to be a hotbed of investing.  Many of these investors make more than $75,000/year and most investors plan on buying new property in the upcoming year.  It is essential to understand how to protect your investment and plan accordingly.

Usually, however, most investors in real estate resist forming for an LLC for a variety of reasons: accounting, lawyer fees, hassle or creating certain inefficiencies in running the investment with one of more LLCs holding real estate.  But despite this resistance, a real estate investor need to weigh the desire to limit liability in investment risk taking v. the investor’s responsibility of potentially having to make whole an injured person.

The question each investor needs to ask:  Have I protected adequately my hard earn investment and potential returns?

Asset protection is just as important, if not more important, than good tax planning.  You need to protect yourself from bad things that happen to all good, honest hard-working people, and when bad things happen, are you going to be able to retain your assets.

Moreover, merely because you have an LLC does not make you safe. To begin with, if you do not respect the “corporate form” of the LLC a good plaintiff’s attorney can “pierce the corporate veil” and set aside the entity to potentially gain access to your personal assets.

The most common veil piercing factors are:

  • Failure to use separate bank accounts;
  • Mixing of personal and company funds;
  • Lack of annual reports/Operating Agreements/Resolutions

All fine and dandy, but you say, “I don’t want an LLC.”  Fine.  But remember as one person stated:

“Of the 18 million businesses in the U.S. over 70% of them are unincorporated proprietorships. Many small business owners make the mistake of putting real estate property in joint ownership and elect not to form an LLC due to the cost, effort, and time associated. But, as with anything that’s worth the time and money, it’s wise to do this upfront work if you want the ability to accumulate greater wealth. Getting the best start, right from the start, avoids the inevitable consequences of short-sighted thinking that you don’t need real estate asset protection.”

Finally, no matter what, if you have an LLC or nor, protect your property with proper insurance coverage. Moreover, if you do have an LLC make sure that the insurance policy names the LLC as the insured and the coverage is appropriate for the type of real estate. 

Real Estate Law

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