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Is Your Tenant Actually A Plaintiff In Hiding?

The Heroic Investing ShowThe time to consider the legal status your new income property purchase should take is before you even close your first deal. Your basic options are sole proprietor, partnership, limited liability company, or corporation. Unless you have high hopes of losing all your personal assets to a lawsuit, cross sole proprietor off the list. Before making the final decision on the remaining options, it would be a great idea to talk to a tax and/or legal professional but, for today’s purpose, we’ll discuss the limited liability company (LLC) since it is a popular and often appropriate choice.

The major benefit to an LLC is that it provides liability protection for your personal assets. The most likely scenarios where this becomes important is the famous “slip and fall accident.” While a lawsuit could eventually clean out everything you own inside the LLC including the property, it should afford good protection against claims being lodged against personal wealth and taking that as well. This is why you should consider placing each individual rental property owned inside its own LLC. Of course, you can also carry liability insurance but the basic idea here is that it is dangerous to hold rental property in your personal name.

When you set your property up as an LLC, you are able to choose the sort of tax structure that applies. For example, you can choose to be taxed as a sole proprietor, S-corporation or C-corporation all within the umbrella of the LLC. The choice you make depends upon your personal situation and, once again, a tax or real estate pro can offer advice on which would work best for you.

On the negative side, though it pales in comparison to a multi-million dollar lawsuit levied against you personally, an LLC requires a bit more attention to detail to set it up and tend to the legalities of running it. Here are the three main issues.

1. Higher expenses. If your LLC is taxed as a corporation, the annual filing fees will be anywhere from a few hundred to a thousand dollars.

2. Start up fees. Depending on the state, an LLC normally costs from $50 to a few hundred dollars to get started.

3. Legalities. To provide the best legal protection, formalities such as holding meetings and keeping written records of the proceedings is necessary.

At first glance, deciding what legal structure to choose for your rental property can seem overwhelming but simply take it one step at a time. Don’t guess if you don’t know. Those lawyers and CPA’s went to school for a long time so they could answer questions just like yours.

The Heroic Investing Team


Flickr / woodleywonderworks


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