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18025 Views 21 Replies Latest reply: Aug 27, 2012 10:06 AM by formanllc RSS
New Member 12 posts since
Dec 28, 2010
Currently Being Moderated

Jan 25, 2011 11:27 AM

Should I Form an LLC

In the process of looking for insurance coverage for our rental home, it was recommended we form an LLC for our rental property.  We have another business, and want to protect the assets of that business.  For the small amount of rental income we have from the property, it would not be worth putting our current business at risk if we were sued.

 

Have others formed LLCs to protect assets?  Have others sought legal advice, and were you advised to do so?

 

Has anyone checked with an attorney, or had the misfortune to find out whether the Accident/Injury Policy we include in contracts will stand up in Court, or if there is any stronger document we can/should have signed that would provide more protection against lawsuits?

 

Mine says (in bold letters and underlined) that the unit is privately owned.  The homeowners are NOT responsible for ANY accidents, injuries, or illnesses that occur to the renter(s), or any guests or visitors of the renter(s), while in the unit, on the premises, or while using any community facilities.  By accepting this reservation, it is agreed that all guests are expressly assuming the risk of any harm arising from their use of the premises or of any harm to others whom they invite to use the premises.

 

Can I do anything stronger than this?

 

I need an air tight risk plan.  My husband has spent 30 years building his business, and I can't risk that on something happening at our rental property.

 

I would appreciate any suggestions.  Also, any suggestions again from others on how they are insuring their properties.

  • murdockvacationrentals Contributor 41 posts since
    Jan 28, 2011
    Currently Being Moderated
    Jun 3, 2013 3:51 PM (in response to kbaz)
    Re: Should I Form an LLC

    This is a great question. Being that you strongly prefer an "airtight risk plan" then I would encourage you to meet with an attorney to ensure that you form the entity(ies) properly and to make sure that your contracts adquately protect you as well. By asking around locally or quizzing local attorneys you should be able to identify one that specializes or has reasonable experience in this area. Any additional protections that you can put in place are always good, be it an entity, security deposit collection, strong contract language, insurance coverage or all of the above. I think the key is to seek advice from a qualified professional as others with experience on this topic may live in different areas and subject to different laws and restrictions.

     

    Good luck!

     

    Munro Murdock
    RA, MBA, Ko Olina Resident
    Hawaii Life Real Estate Brokers

    www.HawaiiLife.com  |  Munro@HawaiiLife.com

    View our Ko Olina vacation rental HERE


    ​"Another day in the life...the Hawaii Life!"​

  • tyann Contributor 223 posts since
    Dec 28, 2010
    Currently Being Moderated
    Jan 29, 2011 10:14 PM (in response to kbaz)
    Should I Form an LLC

    Definitely consult with your attorney and accountant. We did form an LLC (easily done online within a couple minutes) because of the same thing - wanting to protect our other businesses and assets.

     

    Tyann Marcink

    www.vacationhomeinbranson.com

  • New Member 14 posts since
    Feb 1, 2011
    Currently Being Moderated
    Feb 4, 2011 11:30 AM (in response to kbaz)
    Should I Form an LLC

    Our attorney said it can help to have an LLC but it doesn't stop them from going after everything you own.  Same with what you put in your contract.  It will stop some but if they really want to go after you, they will.  He advised the best coverage is good insurance.  He said they go after the insurance first and that good coverage & a high policy amount is the most important things to do other than keep your property in good condition & don't do stupid things.  We currently don't have an LLC but have thought about it since it "helps" even though he said it does not "prevent".

    • New Member 8 posts since
      Feb 24, 2011
      Currently Being Moderated
      Feb 24, 2011 11:37 AM (in response to sandyk)
      Should I Form an LLC

      Our accountant and attorney agree. Any lawyer worth his salt will see right through your llc and call it a corporation of convenience. They both said if you own the property personally just get good insurance. Or if you can afford it you can form a corporation who wholly owns the asset and is it's own entity. At least that was the advise when we looked into it. We have a 5 million dollar rider on our insurance.

  • New Member 15 posts since
    Feb 26, 2011
    Currently Being Moderated
    Feb 26, 2011 11:59 AM (in response to kbaz)
    Should I Form an LLC

    I discussed with a laywer at one point briefly.  For me, an LLC is a bit more complex as my property is out of state, and possibly having to register the same LLC in two different states.  Had the property one year, so still researching the best option.

    As for insurance, get the maximum all the way around. Increments of $1m coverage is slightly more per year.  THEN get an umbrella policy for your personal insurance.  I was told this will help with any gaps in coverage.  Of course, after you are sued your rates my skyrocket, however you will have a better chance at retaining ownership of the property. 

  • spoonbill Contributor 105 posts since
    Feb 24, 2011
    Currently Being Moderated
    Mar 4, 2011 11:35 AM (in response to kbaz)
    Should I Form an LLC

    First, NOTHING can keep you from being sued.  Whether they have a good case is a different question.  Having a separate entity (a corporation) and running it like a business (don't co-mingle accounts or treat it like your personal piggy bank) is the strongest protection for your other assets as they must pierce the corporate veil and show that you and the corporation are one and the same.  If you maintain good books and keep the corporation separate and follow all of the formalities of a corporation then it is very difficult and any law suit will be limited to the corporations assets.  You could lease your property to your corporation so the corp wouldn't actually own the property (it owns a lease which is a legal right of use).  You can put language in the lease that terminates the lease in the event that the corporation experiences certain events such as filing for bankruptcy protection, failing to make lease payments, etc.

     

    Whether going to the expense and effort to do all of this really depends on the level of assets you are trying to protect. Generally, high level liability insurance and high level umbrella policies would provide you with plenty of coverage and they have teams of lawyers to defend you and keep from having to ever pay out any money.

    • New Member 24 posts since
      Jun 9, 2011
      Currently Being Moderated
      Jul 16, 2011 5:44 PM (in response to spoonbill)
      Should I Form an LLC

      Spoonbill,

       

      Enjoy reading your responses to various topics.  We are new to renting and only have a regular home insurance on the property.....if we are renting out occasionally and there was a problem we might not be covered.  Do you know if an umbrella policy would protect us in this case?

       

      Thanks

  • Active Contributor 343 posts since
    Nov 18, 2010
    Currently Being Moderated
    Mar 17, 2011 11:24 AM (in response to kbaz)
    Should I Form an LLC

    Hi,

     

    I thought you might find this transcript of interest - it's an interview of Janet Portman,

    an attorney specializing in landlord/tenant law. She talks about the impact of turning your vacation rental into an LLC.

     

    All the best,

    Laura

     

    HomeAway Community Manager

  • sfvacationhut Community All-Star 643 posts since
    Dec 31, 2010
    Currently Being Moderated
    Mar 30, 2011 12:54 PM (in response to kbaz)
    Should I Form an LLC

    kbaz wrote: Has anyone checked with an attorney, or had the misfortune to find out whether the Accident/Injury Policy we include in contracts will stand up in Court, or if there is any stronger document we can/should have signed that would provide more protection against lawsuits?

     

    Mine says (in bold letters and underlined) that the unit is privately owned.  The homeowners are NOT responsible for ANY accidents, injuries, or illnesses that occur to the renter(s), or any guests or visitors of the renter(s), while in the unit, on the premises, or while using any community facilities.  By accepting this reservation, it is agreed that all guests are expressly assuming the risk of any harm arising from their use of the premises or of any harm to others whom they invite to use the premises.

     

    Yes, I have some news on this.  In spring 2010, we paid our attorney to review our Payment Contract and Guest Rules.  We included a clause very similar to what kbaz has listed above.  When our attorney got to that part, she said, "Well, you know this clause is totally meaningless, right?  Because this will never stand up in court.  If someone gets injured on your premises, they have the right to sue you.  That being said, it's okay to include this in here ... it might discourage some people from trying to sue.  But if they get a good attorney, they will learn right away that this clause is meaningless."

     

    So ... of course we have included the clause, knowing that it doesn't truly protect us from anything.

     

    I agree that the best thing to do is to make sure your insurance is covered for any liability that may arise.  We contacted our insurance agent about this in the months prior to us recieving our first guests.  The insurance agent checked and said we were covered already, under our regular home insurance.  Later on we found out that we were not covered  ... our home insurance only covers rentals of six weeks or more.  Since we handle much shorter stays, the homeowner's insurance considers us to be more like a Bed and Breakfast, not a regular rental, and they don't cover that.  In other words .... even if someone were to file a claim, and it were to come out that they were only staying there for the weekend, or for only a couple weeks, etc, our regular homeowner's insurance would refuse to cover them. 

     

    Therefore we have had to get a separate Commercial Insurance Policy for the guest apartment. 

  • Contributor 166 posts since
    Mar 30, 2011
    Currently Being Moderated
    Apr 24, 2011 12:26 AM (in response to kbaz)
    Should I Form an LLC

    I was considering doing an LLC. But I read and have spoken to a couple of mortgage comapnies and it's a hard thing to do.

     

    If you own a rental unit now and form a LLC. You have to move the Title over to the LLC and not your name. When you do this, it's like having another entity buying it. So some loan contrat request that the full amount be paid or the LLC has to file for a mortgage loan. And loan officers are very unlikley to give mortgages to an LLC since it really has no assets or income. Also, not sure if everything else has to be transferred to the LLC (i.e utitliies, etc)

     

    Wanted to see if anyone was able to get a LLC and vacation rental unit to work out. And if so how? I'm interested in finding out more.

  • New Member 5 posts since
    Dec 22, 2011
    Currently Being Moderated
    Dec 23, 2011 4:23 AM (in response to kbaz)
    Re: Should I Form an LLC

    Kbaz, what did you eventually do? I choose to form an LLC but am having second thoughts. I am having some insurance trouble in that my liability coverage does not cover dogs. See the discussion thread I started on this here: http://community.homeaway.com/thread/3231?

      • marilyn Active Contributor 459 posts since
        Nov 9, 2011
        Currently Being Moderated
        Apr 18, 2012 9:55 AM (in response to kbaz)
        Re: Should I Form an LLC

        First of all you can set up an LLC by yourself and only pay for the filing fees, under $200, or you can get a kit (on line) for about $450.

         

        An LLC is a limited liability corporation. Corporations are set up to protect the people who own the corporation or home in this case. We have only had one law suit and the plantiff (who lost he case) was not able to sue me personally, only my corporation. They fell, broke ankle, claimed negligence (there was none) when they were stinking drunk (person in their 60's).

         

        Perhaps the laws my be different in different states, but I believe the laws are federal, than than state wide.

         

        You can certainly research what your best options are on the internet. Go to most of the government sites.

         

        Marilyn

        www.hamptonhouseptroperties.info

        • spoonbill Contributor 105 posts since
          Feb 24, 2011
          Currently Being Moderated
          Apr 18, 2012 10:30 AM (in response to marilyn)
          Re: Should I Form an LLC

          There are more issues in setting up an LLC than are being presented here.  First, unless you own the property free and clear, the mortgage lender may not be willing to allow you to transfer title to your LLC.  If the property is not held by the LLC you don't have the protection of the LLC.  LLC's just like other forms of corporation are governed by state laws and are different in every state though they may be similar.  A good high umbrella policy say $2-$3M costs less and gives you plenty of protection.  In most states you must operate as a corporation and there are certain formalities you MUST exercise to keep from having the corporate viel pierced.  Additionally, many states charge you annual fees and some states will tax your LLC.  If the only purpose is to limit liability, an umbrella policy may be a far less expensive and time consuming way to accomplish the same thing.

          • New Member 1 posts since
            Apr 18, 2012
            Currently Being Moderated
            Apr 18, 2012 11:14 AM (in response to spoonbill)
            Re: Should I Form an LLC

            I think the major benefit of the LLC is for inter-generational transfers within families.  If you own 25% of the LLC and the LLC owns one or more properties, you can frequently handle the transfer of the stock in the LLC outside of the probate court.

          • marilyn Active Contributor 459 posts since
            Nov 9, 2011
            Currently Being Moderated
            Apr 18, 2012 11:31 AM (in response to spoonbill)
            Re: Should I Form an LLC

            Definitely agree, a good policy is your best bet.

             

            I personally own all of my properties, but have a LLC which manages the properties (which I own 100% of the stock). My accountant says this is my best protection.

             

            Marilyn

            www.hamptonhouseproperties.info

          • New Member 15 posts since
            Feb 26, 2011
            Currently Being Moderated
            Apr 20, 2012 11:04 PM (in response to spoonbill)
            Re: Should I Form an LLC

            I've personally weighed the pros and cons of LLC.  I decided that if I owned more than one property, I would go the LLC route.  BUT there are some costs to it, atleast in my state and my given situation. 

             

            I live in state A, property is in state B.  I would need to form an LLC in state B for the property and then transfer EVERYTHING in the LLC name (deed, utility bills, insurance, etc).  Yes.  EVERYTHING.  One mistake of accepting a payment in my personal account, paying expenses for the property on a personal credit card, or signing any document with my personal name breaks the LLC liability.  AND, it isn't hard for any lawyer to bypass the LLC veil and go after personal assets (I was told).  It is not a corporation entity making decisions...it's a person behind the LLC (unless ownership is structured to protect identify of persons or is a legal entity)

             

            The other thing to remember is that I live in State A.  I need to establish a foreign LLC in state A, as this is where i have nexus.  Why a foreign LLC in State A?  If I want to maintain the perception of LLC protection, I need it everywhere I may be taxed (nexus is created in State A as this is where decisions are made, though income is in State B).  I just encured more LLC fees.  AND, since I don't have physical presence in state B, I need to pay for a registered agent. 

             

            It is tiring.  I wouldn't go with just advice from a CPA.  Couple the CPA's advice with a lawyer and financial/tax planner.  Ultimately, for any protection, get the max insurance available.  We maxed out on property and have personal umbrella. 

  • New Member 11 posts since
    Feb 26, 2012
    Currently Being Moderated
    Jun 3, 2012 9:16 PM (in response to kbaz)
    Re: Should I Form an LLC

    not only should you form an LLC, you should authorize a llc operating agreement to protect your assets and the rights of what you can do.

  • New Member 2 posts since
    Aug 20, 2012
    Currently Being Moderated
    Aug 27, 2012 10:06 AM (in response to kbaz)
    Re: Should I Form an LLC

    I would form an LLC just because all you need is 1 tenant to fall the wrong way and have you in a lawsuit. Don't go with a LLC service company, you can do it yourself following the steps here.

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