21 Replies Latest reply: Aug 27, 2012 10:06 AM by formanllc RSS

    Should I Form an LLC

    New Member

      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.

        • Re: Should I Form an LLC
          Contributor

          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!"

          • Should I Form an LLC
            tyann Contributor

            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

            • Should I Form an LLC
              New Member

              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".

                • Should I Form an LLC
                  New Member

                  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.

                • Should I Form an LLC
                  New Member

                  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. 

                  • Should I Form an LLC
                    spoonbill Contributor

                    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.

                      • Should I Form an LLC
                        New Member

                        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

                      • Should I Form an LLC
                        Active Contributor

                        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

                        • Should I Form an LLC
                          sfvacationhut Community All-Star

                          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. 

                          • Should I Form an LLC
                            Contributor

                            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.

                            • Re: Should I Form an LLC
                              New Member

                              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?

                                • Re: Should I Form an LLC
                                  New Member

                                  I talked to a few people - and they said even forming an LLC wouldn't

                                  protect you if a person suing you had legal counsel - they would find a way

                                  around it - you could try an LLC, but no guarantee.  Best suggestion is to

                                  take a lot of insurance.  I spent MANY hours finding an insurance policy -

                                  found out there are not many companies who will actually cover vacation

                                  rental situations.  When I finally found a policy - I decided not to do

                                  anything about switching to an LLC, because I would have had problems with

                                  insurance based on a different ownership - and I didn't want to go through

                                  trying to find a policy again.  Also, setting up the LLC would have cost

                                  quite a bit - my estimate was $1800.

                                    • Re: Should I Form an LLC
                                      marilyn Active Contributor

                                      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

                                        • Re: Should I Form an LLC
                                          spoonbill Contributor

                                          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.

                                            • Re: Should I Form an LLC
                                              juanrayon New Member

                                              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.

                                              • Re: Should I Form an LLC
                                                marilyn Active Contributor

                                                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

                                                • Re: Should I Form an LLC
                                                  New Member

                                                  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. 

                                          • Re: Should I Form an LLC
                                            New Member

                                            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.

                                            • Re: Should I Form an LLC
                                              New Member

                                              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.