Do I need an LLC?
From time to time I am asked when it makes sense to form an LLC for the purpose of holding title to an investment property, as opposed to holding title personally. In preparing a response to this question, it occurred to me that there might be some interest in the topic of asset protection in general. I will briefly discuss LLC's in this article and at some point in the future I will discuss other asset protection strategies like Family Limited Partnerships. I will also cover strategies that are often mistakenly categorized as asset protection, like Living Trusts.
A limited liability company (LLC) is a separate legal entity. Corporations are owned by stockholders, partnerships are owned by partners and LLC's are owned by members. The person who runs the show is called the managing member (comparable to the general partner of a limited partnership). An LLC formed in California can consist, however, of only one member. John Doe can form Doe Investments LLC to hold one or more of John's properties. How would the LLC come to hold these properties? John would execute a grant deed transferring title of the property(s) to the LLC.
Pros:
Liability Protection: If properly formed and maintained, an LLC will protect you from personal liability in the event of a lawsuit. This protection will be upheld in many cases, even if you do not adhere to the traditional corporate formalities like holding meetings and maintaining minutes.
Pass Through Tax Treatment: LLC's can also be structured to have pass through taxation treatment. In order other words, income will flow directly through to your personal return and losses will flow directly to your personal return.
Cons:
Cost: Formation costs depend on whether you hire a lawyer to draft an operating agreement that will govern the operations of the LLC or you simply file formation papers with the state (can range from a few hundred dollars to several thousand). An annual fee has to be paid to maintain the LLC. Last time I checked the fee was $800. You have to pay an accountant to file a separate tax return for the LLC, which can exceed $1000.
Lenders: Lenders will typically will not lend directly to a newly formed LLC. As a result, most people buy the property in their personal name and then transfer the property to the LLC. The problem is, that is technically a breach of the banks loan documents which gives them the right to call the entire loan due immediately. Do they typically exercise this right? Not really. Have I seen them exercise this right? Yes.
So, the answer depends on how much sleep you will lose at night worrying about lawsuits. The likelihood of a lawsuit is greater on a 20 unit building than a single-family rental. The answer also depends on the appeal of other options like umbrella insurance which costs considerably less to put in place and maintain.
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LOL - Laughs OnLine
"Sir, the IRS would like a word with you"
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What's The Big Idea? 
In anticipation of Oscar night I figured I should share a couple of thoughts about the movies that have been nominated. I think that it is unfair that Brad Pitt gets to star in a powerful movie like "The Curious Case of Benjamin Button" based on a story by one of America's most famous authors F. Scott Fitzgerald; Angelina Jolie gets the equally powerful true story "Changeling" directed by Clint Eastwood, but Jennifer Aniston having already been jilted, gets "Marley and Me". I think Heath Ledger should win for his portrayal of the Joker, not because it would be a posthumous recognition, but because he is the first actor to actually make the Joker (who after all is a murderous criminal), scary. And finally, I think that Slumdog Millionaire should win something just because India deserves to be recognized for having the world's largest film industry both in terms of tickets sales and number of films produced.
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Sincerely,
Kwame J. Granderson
Equinaire
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