Why? Forming Separate LLC for Each Property
Picture this scenario – A person walks by your property, trips over the curb, then proceeds to sue you for all your possessions, even though it wasn’t your fault. This is the property owner’s worst nightmare. The most common option for asset protection is forming separate C-Corporations or LLCs for everything, and this also applies to properties. Properties can be worth hundreds of thousands (sometimes even millions) of dollars, and losing them due to some lawsuit probably isn’t what you wish to happen.
Lots of people still don’t take this risk seriously and have all their properties under one LLC, or even worse, they own them under their own names. Here’s what can happen: You own 2 investment properties, each worth $300,000, and you lose a lawsuit because somebody slipped on the ice in front of one of them and they want you to pay them $1,000,000. So what now? Your 2 properties which, together, are worth $600,000 will be taken away from you, but you still have to pay $400,000. So you may also lose your house, car, and everything else of value to cough up that $400,000. This happens relatively often, but can be easily avoided.
One way to protect your personal assets like your house or car is to form an LLC which will own all your investment properties. In this case, when you (your LLC) are required to pay $1,000,000 and its properties are only worth $600.000, you can lose only the $600,000. Because remember, not you, but your LLC has to pay. And since your LLC only owns 2 properties, those are the only properties that can be seized – so your personal assets remain safe. But there’s an even better option: to lose only one property – see Case 3.
The best thing you can do to protect your properties is to form a separate LLC for each property you own. Let’s look at our situation from this perspective: You have 2 properties (each under a separate LLC) and somebody slips in front of one of them and requires you to pay them $1,000,000. Like in the Case 2, he hasn’t sued you, but the LLC which owns the property. And now, the LLC only owns one property! Therefore, you may lose that property, but the second one remains safe, because it’s owned by another LLC. The fact that both LLCs belong to you does not factor into the fine.
So now you know why forming a separate LLC for each property is the best option to protect them. However, there are some reported downsides to this, so let’s examine them as well.
Weighing the Pros and Cons
You may have read that having (or paying for) multiple LLCs costs a lot of money, and that the better thing to do is to get liability insurance, which can be less expensive. But is saving a few hundred dollars a year per property by getting a liability insurance worth it? Liability insurance does not cover all cases. A simple example is that your insurance covers the costs when somebody slips and falls on a frozen staircase, but doesn’t cover the cost when somebody just falls and there was no railing. There’s also a maximum fee they can cover, so that when you are sued for $1,000,000 and get $500,000 from an insurance company, you still have to pay the other half.
Having a separate LLC for each property costs under $1000 a year and gives you a feeling that your properties are safe even if something bad happens. An Incorporation company like IncParadise can help you make companies for your properties – years of experience will make this a smooth and easy process. Maintaining an incorporated company with IncParadise web app IncContact is also very easy – you’ll see exactly what needs to be done & our incorporation experts are always here to help you.
The whole incorporation process & maintaining a company is just filling out a few documents along with paying a few hundred dollars. Our incorporation experts will take care of the rest and are always here to help you.
Where to Incorporate?
Maybe you wonder which state you should incorporate in – we recommend to choose a state where your property is located. You may have heard about Delaware or Nevada and their advantages, but they’re not applicable in your situation. When your company is in the other state, you have to make a Foreign Qualification in a state where you own a property. Incorporation fees among states vary by a couple hundred dollars, but they are mostly fair.
Founder & CEO of IncParadise.com, which already incorporated over 10,000 companies. IncParadise.com is one of the biggest incorporators in the U.S.A. helping entrepreneurs to file paperwork for Corporations and LLCs. John strongly believes that successful companies can be built with minimum investments and can produce substantial results in short period of time.