Limited Liability Company (LLC)


Powerful tool to protect company assets

The first LLC was established in Wyoming in the 1970’s. The goal was to create a business structure that had the benefits of a corporation’s limited liability without the downside of double taxation.

Today it is recognized in all fifty states with well-established case law and statutes.

Over the years, beyond the benefit of operating a business, the Limited Liability Company (LLC) has evolved as a powerful tool to achieve many asset protection goals.  The LLC is the most convenient strategy and effective entity for owning the rental properties, insulating Dangerous Assets, and achieving an excellent level of financial privacy. One of the advantages that the LLC has is that it provides the protection from liability as a corporation without the formalities of corporate minutes, bylaws, directors, and shareholders.

In contrast to corporate law, which allows shareholders and officers to be individually sued if the corporate formalities are not followed, the LLC law specifically bars a lawsuit against a member solely because of a failure to follow these formalities. Therefore, this makes LLC very appealing in the asset protection planning especially provide protections to the landlords.

As most landlords know, there is an inherent risk of liability with property ownership. Some of the risks are foreseeable and can be effectively insured against. Others cannot. Should an accident occur, you might lose not only the property itself, but all of your other personal assets as well. Although insurance can limit your potential exposure, why be exposed at all? The California limited liability company (LLC) offers its member-owners the same limited liability protection offered by the corporation. [California Corp. Code ยง17101(a)]. Even with adequate insurance coverage, if some negligent act results in severe injury to a tenant, worker, or guest, the resultant award may far exceed the insurance coverage. If the property is held in your personal name, the claimant will be able to attach your personal assets (including other properties, your home, bank accounts, vehicles, stock) to satisfy the judgment. By contrast, if the property is held in a California limited liability company, the LLC may be liable, and its assets subject to attachment by the judgment creditor, but the individual member's personal assets will remain protected.

In addition, a California LLC protects against claims by creditors of the members of the LLC. With a proper LLC Operating Agreement, the creditors of an individual member of the LLC cannot attach the assets owned by the LLC, nor can they step into the shoes of the member. At most, a judgment creditor will be able to place a lien on the distributions from the LLC to the member (if any).

Like a California corporation, a California LLC generally affords its owners with personal liability protection from lawsuits. But the assets within the LLC are not protected from such lawsuits, and creditors of the LLC typically can attach the LLC's assets. Accordingly, despite the additional tax burdens, you should consider placing each of your investment properties into their own separate California LLC.