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Should I Set Up an LLC Per Rental Property Owned?

 

In Illinois, setting up an LLC or otherwise called a Limited Liability Company is inexpensive.  Filing fees are now $150 for a non-expedited LLC. I often see property owners that have their rental property in their personal names, or the property is listed in a husband and wife’s joint names as joint tenants.  

Asset protection is critical for rental property owners and real estate investors.  One lawsuit can destroy a lifetime of saving and good decision making. The general rule is that a real estate investor should set up a new LLC per rental property that they own.

The benefit of Separate LLCs for Rental Property Ownership

Liability planning is a huge concern nowadays especially with rampant litigation and one lawsuit destroying a lifetime of good financial planning.  There are three types of liability planning. The first liability planning strategy is the use of liability insurance, which should cover any liability issues involved with a rental property such as a homeowner’s claim.  

The second type of liability planning strategy is the use of an umbrella policy.  An umbrella policy is a type of insurance that adds additional liability coverage over and above a liability insurance policy such as homeowner’s insurance or renter’s insurance.  The main purpose of an umbrella policy is to protect one’s assets from a major event such as a tragic accident such as bodily injuries and damages. The umbrella policy provides additional insurance coverage for a property owner.  

The third type of liability planning strategy is setting up an LLC.  The purpose of the LLC is to shield your personal assets from business liability issues.  Rental property owners often will set up an LLC per rental property in case one rental property has any litigation concerns.  The purpose of segregating each rental property in an LLC is to maximize asset protection for each rental property. The concern with using separate LLCs is due to a lien or litigation matter at one rental property that will affect all the properties if all of the properties are in one LLC or in a person or couple’s personal names. 

A judgment in one’s personal name or a joint liability will attach to each property in one’s name.  Thus, one can have multiple real estate properties and one cannot sell any of the properties without satisfying a litigation matter or judgment if the judgment is in one’s personal name.  During the Great Recession, many real estate investors purposely defaulted on one property because it was upside down.  

There were several real estate investors and owners that had multiple properties in their personal names that lost everything.  The reason is that one lawsuit or foreclosure matter threatened all of the properties owned by this real estate owner. The goal of asset protection is to maximize one’s liability protection and eliminate or reduce the likelihood of a lawsuit.  The goal of asset protection is to eliminate the possibility of a major incident or reduce the likelihood of a lawsuit.  

For example, let us assume that a husband and wife own three rental properties including their personal residence.  One property is located in Joliet; one property is located in Yorkville; and another property is located in Plainfield, Illinois.  One slip and fall accident in Joliet could affect the properties in Plainfield and Yorkville if the properties are not properly structured. 

Litigation matters are foreseeable and the benefit of setting up an LLC is to protect one’s assets from the liability exposure of litigation concerns.  Unfortunately, many people’s personal assets and family assets are threatened with a slip and fall accident or another litigation matter if one’s properties care not set-up properly.  An umbrella policy is a good strategy, but it is insufficient because insurance companies are known to dispute claims. Moreover, an umbrella policy will not protect one’s assets from a foreclosure lawsuit against one of their properties.

In conclusion, it is recommended that each rental property should have its’ own separate LLC.  Sean Robertson and Gateville Law Firm counsel real estate owners on their asset protection and estate planning goals.  Sean Robertson may be reached at 630-780-1034.

 

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