While real estate investors may not feel like they are a part of a business, they are. If you are considering purchasing a rental property, you should consider forming an LLC (Limited Liability Company) to protect your personal assets in case of a lawsuit.
What are some common lawsuit claims?
- Slip and falls
- Faulty Stairs
What is Asset Protection?
- Legal techniques dealing with protecting assets of individuals and business entities from civil judgments.
How To Avoid Lawsuits as Property Owner:
1.Maintain Adequate Liability Insurance
- Umbrella Policy
- Review your Coverage Annually
- Insurance is in Effect
- Freely Provide Insurance Infomation to a potential claimant
2. Get Real Estate Out of Your Name
- Control and Benefit
- Through a limited liability entity
Types of Entities in Colorado
- Limited Partnership
- Limited Liability Partnership
- Limited Liability Limited Partnership
- Limited Partnership Association
- Limited Liability Company
What is Limited Liability?
You are not liable for the debts of the entity simply because you have an ownership interest in the entity.
What are the benefits of Limited Liability Company?
- Any number of members
- Limited liability of all members regardless of management
- Members can be individuals or any other type of entity
- Flexibility and management under an operating agreement
- Can be a disregarded entity for tax purposes
- The anonymity of members – members are not public record
Disadvantages of Limited Liability Company?
- The fees that are associated when setting up an LLC
- Finding financing through a lender could be tough
- Asset Protection is not 100% guaranteed
How to Set up Limited Liability Companies
- File articles of organization
- Forms available on the Secretary of State’s website www.sos.state.co.us
- Operating agreements
- Periodic reports
- File deeds for properties from you to LLC’s
- Due on sale clause
What is the Cost for LLC?
- The filing fee is $50.00
- Recording fee for Deed is $5.00
- Annual periodic report filing fee is $10.00 if you file online
- If all LLC’s have one member no additional tax returns necessary
Corporations and Partnerships
- Corporations must be taxed as ‘C’ Corporations or ‘S’ Corporations
- ‘C’ Corporations have double taxation and no capital gain tax rate
- ‘S’ Corporations have limits on the types of shareholders
- Cannot be disregarded for tax purposes
- Partnerships by definition require two partners
In conclusion, no asset protection plan is foolproof. You can always be named in a lawsuit. It is wise to start planning before a crisis arises so it will be difficult for lawsuits to succeed and if you do receive a lawsuit your asset will be protected. Just remember Asset Protection should not be in place of insurance and maintain plenty of liability insurance.