If you are a real estate investor chances are that you have already heard about using a LLC (Limited Liability Company) for asset protection. Creating a LLC takes some time and money. Because of this it turns a lot of investors away from the entity. Allow me to make a case for the benefits this entity offers you. After all, as a good investor you need to justify every cost! Otherwise you wouldn’t have wealth and assets to protect.
An investor who does not use some kind of entity to own their property is risking everything to a single lawsuit. Even worse, if that investor has entered into partnerships with other investors they likely used a general partnership (a handshake.) From an attorney’s point-of-view this ownership structure is ideal because it exposes the investor. This meas a judgement against the investor could take everything owned in your name.
By forming and operating a LLC properly will allow the liability of anything you place in the LLC is separated from your personal name. If a lawsuit does occur, the judgement is limited to the assets within the LLC. Not only does this mean you are risking less in a worst-case-scenario, but it also means you are less likely to face that scenario. Why? People will have less incentive to sue you, since you are limiting the potential earnings they could take.
Take a scenario where someone initiates a lawsuit and you lose, but you hold that property in a LLC. The lawsuit would only impact the assets within the LLC. While you could lose that single property to a lawsuit, it is a much better option than losing the property AND your personal assets. The cost of forming a LLC protects your house and other assets from landing in a future settlement or judgement. And this protection scales for investors with large portfolios utilizing entities such as the Series LLC.
Setting up a LLC can take anywhere between a few weeks to a couple months, depending on whether the state approves the name you select for your LLC. Once the LLC is formed you will receive an EIN and can set up a bank account. This allows you to operate the LLC separate from your personal finances. You will balance all collections and expenses through the LLC bank account, proving it can operate on its own. When tax season comes around most people simply have the LLC function file as a pass-through entity.
Scott Royal Smith is an asset protection attorney and long-time real estate investor. He's on a mission to help fellow investors free their time, protect their assets, and create lasting wealth.
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