It’s a good idea to think about how to protect yourself and your business from legal issues that, however rare, may arise. Here in the United States, the LLC (Limited Liability Corporation) is considered the gold standard.
The idea behind the LLC structure is that you are legally separated from your business. If you, for example, get in a car accident, your business can not be taken away from you. Conversely, if a tenant sues you concerning your business, you can’t lose your home or personal savings.
Once you have created the LLC (an entirely different conversation, but really pretty easy), make sure that you transfer everything related to your property into that LLC. And only do business in the name of the LLC.
This means that your checking account and credit card will be in the LLCs name. Make sure that rent checks are made out to the LLC name. Make sure that repairs and correspondence are in that name, too. If you need to set up utilities, they also will be in the LLC name.
Your taxes will be filed as an LLC, on a form 1065. Not in your personal taxes!
Transfer your property into the LLC. (If you already had the LLC set up, you’re in luck. You can likely buy the property in the LLC name, including the mortgage and financing.) It’s easy to transfer the property using what’s called a warranty deed. Don’t worry, even though you won’t own the property anymore, you own the LLC, so you aren’t out of the picture!
If you already owned the property prior to setting up the LLC (or had to purchase under your name), be sure to tell the mortgage company about the change. This will likely be the hardest part of the process, believe it or not. Many companies resist putting the mortgage into a business name, and some will flat out refuse. If they do refuse, ask about adding the LLC to the mortgage. Worth a shot.
Don’t forget to transfer the insurance policy (or policies, if you also have flood insurance, for example) into the LLC name. I’ve never had an issue with this. An important tip: if your mortgage is still in your personal name, make sure that both the LLC name and your personal name are on the insurance policy. You don’t want to be rejected for coverage due to a technicality.
Finally, be sure to set up separate LLCs for each property! This will protect your other properties from the one being sued.
Yes, this all sounds like a pain, and likely you’ll never need the protection. But you’ll sleep better at night, I promise!
2 thoughts on “The best way to protect your rental business — and yourself”
Can you handle the LLC paperwork yourself or do you need a lawyer?
You definitely need a lawyer! Not only are there the forms that you’d expect (forming the LLC), but you also need to have Organizational Resolutions and Company Agreements set up. An experienced Lawyer will make this painless.