The big question is whether you want an LLC for your rental properties, or just umbrella insurance, or both. The answer: it depends! Each situation is unique so consult your lawyer and CPA. Below are some pros and cons of each, in a general fashion, not addressing your unique situation.
* Creditor Protection: if operated correctly, then a creditor should have a difficult time piercing the veil, and thus hopefully your liability is limited to the assets inside of that LLC
* FICA Tax Savings: If your CPA elects S corp status, for one example, then you might find considerable tax savings on your employment related taxes, if your CPA deems this a possibility in your unique situation.
* Separate properties: You can have multiple LLC's, thus separating your properties, and thus potentially keeping the assets of one LLC out of reach of the creditors of another LLC of yours.
* Partners: An LLC Operating Agreement can help explain the various members know their rights and responsibilities in cases such as death, divorce, bankruptcy, sale, etc.
* Pierced Veil: A lawyer may be able to pierce your corporate veil, depending upon the circumstances.
* Loan Difficulty: It may be harder to get a loan for an LLC than if you didn't have an LLC, or the term of the loan may be less favorable if taken on by an LLC (i.e., shorter term, higher rates).
* Cost: The cost to setup the LLC, plus annual state tax filings, plus annual Registered Agent Fees if you hire a professional registered agent.
* Umbrella Cost: The cost of the umbrella may potentially be higher for an LLC, and/or may require commercial grade insurance, so due your due diligence with your insurance agent.
* Due on Sale Clause: If you transfer a home with existing debt (mortgage) to an LLC, then there's a good chance that it will trigger the due on sale clause, which means that the loan will become immediately due and payable. The good news is that many lenders have not exercised this clause historically. The bad news is that some have, and yours may, and so it's a little bit like playing with fire.
* Protection: Umbrella policy may give you lots of protection, and typically at an affordable cost.
* Quick & Easy: It's often quick and easy to obtain.
* Not enough: The lawsuit judgment may exceed the umbrella policy, and thus your assets may be subject to judgment.
* Quantity Limitations: You may be limited to the number of properties that you may be able to cover.
* Quarantined: An LLC can limit judgments to the assets inside of the LLC, but an umbrella policy, if inadequate, won't protect your other assets, or your other LLC's from attack (in a general sense for illustrative purposes).
It's a risk/return game, like everything in life. You can save money by having neither, and thus potentially maximizing your profit potential, but you're also increasing your risk of loss. Alternatively, you can pay up for the protections potentially afforded by LLCs and Umbrella Policies, thus reducing your return potential, but also, in theory, reducing your risk of loss.
Some due diligence that you should do:
* Find out rates for creating an LLC, Operating Agreement, State Filing Fees, ongoing fees for franchise tax returns, registered agent, etc.
* Find out how much an Umbrella Policy of desired coverage would cost you if you bought it personally, or corporately via commercial insurance for an LLC(s).
* Get written approval from your lender that they will not enforce your due on sale clause in your mortgage if you transfer your property(s) to your LLC(s).
* etc, etc.
Meet with your lawyer, your CPA, your insurance agent, and other trusted advisors to determine what is best for your unique situation.
Mike Massey, JD,
Mike Massey Law PLLC
Austin Texas Attorney