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Author: Michael Elson
Article source: http://www.articledeshboard.com/. Used with author's permission.
Generating income is the primary goal of any entrepreneur. Equally important to businessmen and investors is the desire to avoid personal financial liability for the obligations of the business. The invention of the traditional corporation and more modern business entities such as the Limited Liability Company, have created a risk barrier which encourages business ventures yet shields the owners' personal assets from seizure.
As a landlord, you are subject to virtually unlimited financial liability and exposure arising out of the operation of your rental property. Large lawsuit judgments against landlords are becoming increasingly common. Without the protection of a Limited Liability Company (LLC), your home, vehicles, bank accounts, and other personal assets can be swept away.
Reorganizing your rental property into a LLC can eliminate this risk to your personal assets. A properly formed LLC is a separate and distinct business entity with its own taxpayer identification number. The LLC, rather than the landlord, becomes the owner of the individual rental property. In much the same way as shareholders of a corporation are protected from liability, a LLC will provide limited liability to its owner(s) and shield their personal assets. Should the owner(s) wish to manage the LLC's daily operations, either in full or in part, they will be legally classified as employees of the LLC. Therefore, the maximum financial exposure to the owner(s) of the LLC, including exposure from acts of its employees, is limited to the individual property held in the LLC, and nothing else.
Once your attorney completes and files the array of legal documents required for the initial formation of your LLC, you will no longer be personally liable for any debts or judgments against the LLC. Utilizing the LLC eliminates the double taxation and extensive formalities associated with a traditional corporation. Perhaps the most obvious changes are that lease agreements are between the LLC and the tenant, rent checks are made payable to the LLC, and when evictions are instituted, it is the LLC that is evicting the tenant, thus eliminating the appearance that you are personally seeking the eviction.
The State of California requires the LLC to pay an annual $800 franchise tax fee, the same as a regular corporation or limited partnership. This fee, however, can be viewed as a yearly "insurance" premium, which provides vastly more protection than private insurance with an equivalent premium amount. The beneficial result is that the maximum financial exposure to the owner(s) of the LLC, including liability from acts of its employees, is limited to the individual property held in the LLC, and nothing else. But the LLC will not shield your assets from probate and estate taxes the way a living trust can.
The Living Trust is a legal instrument that holds title to a person's personal assets, including bank accounts, real estate, stocks, LLC membership interests, etc. The Living Trust contains your instructions for the distribution of your assets after you die. Because a person's assets are transferred to their Living Trust during their lifetime, probate is avoided entirely. After the person who established the Living Trust (the Trustor) dies, the successor trustee(s), who are usually the adult children or relatives of the Trustor, simply distribute the trust assets to the designated beneficiaries. Because the Living Trust eliminates probate and, under a variety of circumstances, can greatly reduce estate taxes, it may be possible to pass on a much greater portion of your assets to your heirs. The Living Trust, unlike an LLC, however, is not designed to protect personal assets from exposure to lawsuit liability.
In conclusion, the LLC and Living Trust work together to protect and preserve your assets. These estate planning and asset protection instruments can be created at the same time or independently of one another, and both can be modified or dissolved at any time by the owner. Given the tremendous advantages of these legal instruments, they are frequently utilized by real estate investors for the benefit of themselves and their heirs.
Michael Elson is a Los Angeles business attorney who provides LLC venture planning, corporation consulting, and is an estate planning and living trust attorney. With years of experience as a living trust attorney and investor, he counsels clients on proper structuring of their business and personal assets.
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