Question: To LLC or not to LLC

'For Rent:' A question from rental property owners about whether they need an LLC?

Recently my husband & I were told by our lawyer that the rental property we own should be under an LLC. We have owned this property for almost ten years and it has been in the names of our two children and ourselves, four people total, for the entire time. We want to make sure this property goes directly to the kids at our passing. The building, our property is a condo, carries insurance, we carry insurance on the condo itself. A few years ago I refinanced our house and paid off the mortgage loan on the condo. The re-fi consolidated two loans and lowered my interest rate considerably. I also make extra payments on the principal as often as possible. I understood why we would not just put the property into their names right now - a big ouch on taxes due for them - but we were confused about the need for an LLC. Thank you so much.

Response:

Your lawyer's recommendation is really about sound risk management. A limited liability company -- LLC -- is often a good business structure for entrepreneurs.  

You get the the limited liability protection of a corporation with an LLC. With an LLC you would be "protected from personal liability for business debts and claims... This means that if the business owes money or faces a lawsuit, only the assets of the business itself are at risk. Creditors usually can't reach the personal assets of the LLC owners, such as a house or car," according to Nolo.com, the self-help legal organization.   

At the same time, you report any losses and profits from the business on your personal income tax return.  You can learn more about LLCs and how it works (as well as alternatives to the LLC) here.  

I would work with your lawyer to make sure the LLC is set up properly.

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