Starting a real estate business as a real estate investor or a landlord is an important first step. Picking the correct business entity is a vital and important decision for real estate owners and landlords. Gateville Law Firm is your experienced real estate lawyers servicing Kendall County, Illinois for real estate investors and owners, real estate builders and developers, and landlords.
Liability Insurance for Non-Owner Occupied Real Estate
Real estate owners often wonder is it necessary to incorporate as a Limited Liability Corporation or otherwise known as an “LLC” if they have adequate liability insurance. Owning real estate in one’s personal name or as joint owners is risky because liability insurance alone is insufficient. As a general rule, your home owners’ insurance is inadequate for rental property. Home owners’ insurance is intended for personal coverage such as your primary residence. In contrast, landlord liability insurance is intended for commercial rental such as rental of a single-family home or condo. The purpose of landlord liability insurance is to provide insurance coverage for liability concerns involving rental property.
One of the downsides of liability insurance is the type of coverage that is available. Insurance contracts typically have a page or two at most concerning the types of coverage available to landlords. The exceptions and exclusions to the policy tend to be the most extensively covered part of the rental landlord insurance coverage. Often, incidents may occur and the insurance company may deny coverage or the insurance coverage may be inadequate for the situation. Collapsed porches and fatal accidents may result in a large verdict, which may extend beyond the insurance coverage that an individual or couple may have.
LLCS as Extra Coverage
Limited Liability Corporations are increasing in their popularity. In Illinois, the new Limited Liability Company Act, 805 ILCS 180 lowered the cost of an LLC from $500 to $150. This was a substantial reduction in the cost to operate a Limited Liability Corporation in the State of Illinois. This important change makes it much more affordable to set up and operate an LLC for your rental properties for landlords. Previously, Illinois made it difficult to set up and operate an Illinois for rental property in the State of Illinois.
Landlords and real estate owners are making a bad financial decision by relying on liability landlord insurance as a sole means of limiting their liability concerns. During the great recession, many landlords and rental owners strategically defaulted on their mortgages because of liability concerns. Relying primarily on landlord insurance would have made a strategic default impossible for most landlords. Setting up an LLC is an important financial decision to limit one’s liability concerns and risks. A strategic default is a last resort for most rental owners but may be the best decision depending on whether you have a judgment or have made business mistakes which are impractical to overcome.
Incorporating as an Illinois Limited Liability Corporation is a smart decision.
LLCs are generally the preferred choice of real estate investors and landlords. LLCs are advantageous for several reasons. The first reason is cost. LLCs are more cost-effective than setting up an S corporation now in the State of Illinois. The second reason is limited liability protection. LLCs provide personal liability protection against business and real estate risks associated with real estate ownership. Setting up an LLC assist to limit one’s liability concerns. For example, a landlord in Yorkville, Kendall County (Illinois) sets up 123 Yorkville, LLC to own a single-family home at 123 Kentshire Street, Yorkville, Illinois 60560. The purpose of setting up the LLC is to limit the risks associated with their ownership of the single-family home. The liability insurance should be in the name of 125 Yorkville, LLC. Second, if the landlord or real estate owners owns additional rental property, it is important that each property have its’ own LLC. Each year, the LLC shall file their annual report and have an annual meeting with minutes. The purpose of setting up an LLC is to limit one’s liability and protect one’s personal assets from lawsuits associated with their business interests.
LLC is a Pass-Through Entity: No Tax at the LLC Level
One of the advantages of an LLC is simplicity. The LLC is considered a pass-through entity because the LLC is ignored for tax purposes. Simply put, the LLC is treated as though the LLC does not exist. The individual landlord or real estate owner pays individual income tax as though the LLC was never set up. The owner of an LLC avoids double taxation unlike a regular C corporation. There is no LLC tax unlike an C corporation. The LLC is treated as though the individual was a sole proprietor without the burden of the complexity of operating a Corporation or LLC. Generally, an LLC is considered a disregarded entity because the incomes and expenses of ownership of the LLC flow through to the individual or joint owner’s tax return(s). Thus, the LLC provides liability protection while providing easy of ownership.
Multi-Member LLCs vs. Single-Member LLCs
There are two major types of limited liability corporations or otherwise known as “LLCs.” A single-member LLC is a one person owned and operated LLC. In contrast, a multi-member LLC is a multi-owner (more than two owners) operated by two or more individuals or entities to operate an LLC. LLCs are generally taxed as partnerships unless one decides to be taxed as an S corporation. S corporation taxation can be beneficial because of the reduction in employment and payroll taxes. Dividends are generally without any employment and/or payroll tax implications.
Multi-member LLCs provide flexible management situations especially for family-owned businesses. LLCs provide member and/or management managed ownership options unlike S corporations. One of the benefits of an LLC is its’ flexibility. It is important to have an LLC Operating Agreement for multi-member LLCs. An LLC Operating Agreement is essentially a partnership agreement for real estate owners or landlords. Describing how profits and losses will be shared is an important legal and financial consideration. Unlike S corporations, LLCs are flexible and realistic and are more able to consider part-time owners and investors. Often, one real estate investor or manage may be full-time in the real estate business while another investor or two may be employees with day jobs. The LLC has the advantage of being able to be set up to operate consistently with the true concerns and business realities of real estate businesses unlike S corporations.
EXPERIENCED REAL ESTATE ATTORNEYS FOR LANDLORDS AND REAL ESTATE OWNERS IN YORKVILLE AND OSWEGO, ILLINOIS (KENDALL COUNTY)
In conclusion, Gateville Law Firm is your experienced real estate attorneys for real estate agents, investors, and landlords in Yorkville and Oswego, Kendall County, Illinois. Gateville Law Firm is comprised of experienced attorneys and professionals servicing landlords and real estate owner’s legal needs. Gateville Law Firm may be reached at 630-780-1034 or via online contact form.