Sussman & Associates discuss how to protect personal assets from being sought and claimed in a subsequent legal action.
WHY TRANSFER INVESTMENT PROPERTY TO A LLC?
Rental property is a popular investment in California, with the state’s reliably high rental rates resulting in impressive returns. One drawback to being a landlord, however, is the potential liability for a tenant injury or other accident that occurs on the property.
In order to protect personal assets from being sought and claimed in a subsequent legal action, it is prudent to transfer the investment property into a limited liability company (LLC) or other entity. Of the different choices in many cases the LLC turns out to be the best choice of entity to take title. There is less restrictions on the operating of the company but it still offers protection against personal liability in most cases. Usually, only the assets of the LLC are at risk should any legal or financial issues arise concerning that investment property.
Leaving the property in your own name exposes you to personal liability for any damages that insurance doesn’t cover. Your home, car, and bank accounts could all be used to cover these costs.
ESTABLISHING A LLC
Setting up a LLC in California requires you to find a name for the LLC that is not already being used, file a certificate of organization for the company with the State, and obtain an Employer Identification Number (EIN), which is to be used for tax and other business-related documents.
The process for setting up a LLC can be found at the California Secretary of State website, but you may want to consult with a real estate attorney to ensure it is done correctly. An attorney can also assist with the actual transfer of the investment property into your new LLC by means of a quitclaim deed or other type of deed. The attorney can help you determine which legal document is best suited to your specific circumstance.
THE LLC OPERATING AGREEMENT
Once the LLC is established and the investment property is under its ownership, it is important that the owner-member (or owner-members if the property has multiple owners) manages the LLC properly. This entails creating an operating agreement that lays out who the member-owners are, their respective responsibilities and obligations, how the LLC will be run, and the LLC’s tax status.
Without a detailed operating agreement in place the LLC could be deemed insufficiently managed, resulting in the owner-members being found personally liable for damages or fines in the case of litigation or an audit.
The best way to ensure that you and your personal assets are protected and kept separate from your investment property is to consult with one of our real estate attorneys before forming a LLC.
In a perfect world, you'd create your LLC before you buy the property you wish to speculate in. In this case, you will undoubtedly have to be compelled to file multiple quitclaim deeds to transfer property or raise lenders to consent to your dealings, on constant vein, you’ll be able to decide earlier than time whether or not you wish to line up a separate LLC for every property or mix all of your rentals into one entity.
An important next step is to vary all of your leases to replicate that the new landholder is that the liability company, not you, so you'll be able to make the most of all the protections currently afforded you. Communicate to your tenants that they have to pay rent to the corporation, to not your personal name. And make sure continually to deposit your rent payments into your separate LLC checking account. These steps once you transfer can facilitate shield your assets from personal liability ought to one thing fail. an easy name transfer will prevent tons of headaches.
An LLC is usually perceived as providing the limited liability protection of an organization while not the necessities of obliging with all the formalities of an organization, like holding conferences and maintaining minutes and different records. This perception is usually mirrored by opinions of legal specialists. This perception is often reflected by opinions of legal experts.
For more information about our legal services, please contact us at 800-233-8521.