Asset Protection and Limited Liability Companies

I have had quite a few questions recently about "Asset Protection" and limited liability companies.  Many clients transfer a rental property into a California limited liability company, an "LLC", for asset protection purposes, without fully understanding what "asset protection" is and why an LLC can provide it.

The concept is simple.  Imagine you own a rental property in the name of yourself and your wife, as joint tenants.  You rent this property to a couple with one child.  You have a written rental agreement (good for you!) and collect rent on a monthly basis.  You retain a general homeowners insurance policy for the value of the home. One day, a guest of the renters' falls off the roof and suffers a tragic death (it is dramatic to make the point easier to comprehend). 

As the owner of the property, you and your wife will most likely be named in any litigation for recovery by the guest's widow.  If the widow is able to obtain a judgment against you greater than the amount of your homeowners insurance policy, she will be able to enforce this judgment not only against the rental property, but also your personal assets including your residence, bank accounts, etc.

If you had transferred the rental property into an LLC, the LLC would be named as a defendant in that lawsuit, as opposed to you and your wife.  If the widow was able to obtain a judgment, it would be against the LLC, which does not include your personal assets such as your residence, bank accounts, etc.  The widow will not be able to enforce the judgment against all of your personal assets. 

This is one way to limit the risk inherent in owning rental property, and to "protect your personal assets."  Remember, in order for the LLC to be considered a separate legal entity and upheld by a court of law, the formation, implementation and ongoing maintenance of the LLC must be correct.  There are also many property tax pitfalls with transferring property from an individual to an LLC.  If you would like more information about asset protection or LLC's and their formation, please call us.

Article Submitted By: Attorney Brooke Pollard