At de Jesus Law Group we encourage all rental property owners to structure as a limited liability company (LLC) because LLCs offer personal liability protection for their owners. Holding property in an LLC creates a layer of legal protection, which works as a barrier between your business and your personal assets (and income). There are also many benefits, including tax benefits that LLC owners can take advantage of.
Although the administrative requirements for an LLC are far less complex than those for a corporation, you’ll still need to abide by some operational guidelines if you want to maintain your personal liability protection. If you fail to adhere to these formalities a court could remove the protective barrier shielding your personal assets, known as “piercing the veil,” leaving you personally liable to pay.
If you are sued because someone is injured on your rental property, including a guest of the tenant, then your personal assets may not be protected as a landlord. Regardless of how small or insignificant the lawsuit may seem, it can be a costly process to defend your assets.
While the formalities required for LLCs vary by state, implementing and adhering to the following five best practices can help ensure your company stays in compliance, your veil remains intact, and your personal assets have the maximum protection possible.
01 | CREATE AN OPERATING AGREEMENT
Though most states don’t legally require LLCs to have an operating agreement, it’s vital that you have one in place, even if you’re the sole owner. An operating agreement provides the essential legal guidelines and framework for how your company will be run, and it clearly establishes the business as a separate legal entity.
Among other functions, an operating agreement details how the ownership, responsibilities, and profits are divided among the LLC owners (known as members); it establishes how the company will be managed; and it outlines how the company is to be dissolved or sold. We can support you in creating and maintaining a robust operating agreement that suits the specific needs and circumstances of your particular business.
And if you have partners, negotiating your LLC operating agreement is an absolutely critical part of creating a strong relationship that can withstand the test of time and deal with any potential conflicts that may arise down the road.
02 | CONDUCT ALL BUSINESS IN THE COMPANY’S NAME
All business should be conducted in the company’s name, not your own, and this includes adding your chosen limited-liability abbreviation to your company name. This also means using the company letterhead on all correspondence, identifying your company on websites and social media, naming the company as a party in all legal agreements, as well as when making all financial transactions.
Never, ever, ever, ever sign a legal agreement in your own name. Every legal agreement should be signed in the name of your LLC. And while you’re at it, never sign a legal agreement without having an experienced business lawyer (us, naturally) review it.
03 | KEEP A SEPARATE COMPANY BANK ACCOUNT, & NEVER MIX PERSONAL AND BUSINESS FUNDS
As soon as possible after filing your LLC formation documents and getting your employer identification number (EIN), you should set up a bank account in the company’s name. This account should be used for all company transactions, from making major purchases from vendors to buying everyday office supplies.
Additionally, payments to the company should always be made to the company account, not a personal account, and company funds should never be used to pay your personal bills. Commingling of personal and business assets is one of the main reasons courts “pierce the veil” of an LLC’s liability protection. For this reason, keeping your company’s finances separate from your own is a top priority.
That said, if you have already “commingled” personal and business finances, call us so we can help you address this issue and put in place financial systems that will make separating your finances a snap.
04 | FILE REGULAR REPORTS WITH THE STATE
Nearly all states require LLCs to file regular reports—generally on an annual basis—with the state agency responsible for registering business organizations. Such reports keep the governing agency apprised of your company’s status, and they are sometimes called a “Statement of Information.”
Each state has different rules on how often and when a report needs to be filed, what filing fees must be paid, and if other documents need to be filed with the report to address key changes to your LLC. We have processes that can help keep you up-to-date on your state’s latest reporting processes and requirements to ensure your filings are always made on a timely basis.
05 | HOLD REGULAR MEMBER MEETINGS & KEEP MINUTES
Although very few states legally require LLCs to hold member meetings and keep minutes, doing so is important for a number of reasons. Most importantly, holding regular meetings with accurate minutes provides strong evidence that your LLC is serious about observing administrative formalities. Combined with your operating agreement, regular reports to the state, and diligent separation of personal and business finances, such meetings offer extra protection if creditors ever seek to pierce your corporate veil.
Outside of protecting your personal liability, holding regular meetings and keeping detailed minutes just makes good business sense, especially for multi-member LLCs. For instance, holding regular meetings facilitates consensus among members when making major decisions, keeps members informed of business actions, and provides a forum to plan for your company’s future.
Meeting minutes also provide a clear record of member discussions, votes, and decisions, which can help reduce member disputes and conflict. Plus, keeping detailed minutes provides solid documentation of your company’s operations should the IRS or courts ever request such records.
PROPER PLANNING FOR YOUR RENTALS
Your homestead isn’t the only property you should plan for in the event of incapacity or death. There are certain types of trusts that will automatically allow assets to easily pass on to your children (or whoever you want) in this case. To do this, you can set up a trust with de Jesus Law Group and then allow the trust to own your interest in the LLC.
If you put your rental properties in an LLC, you will still have to pay for the cost of an attorney should you be involved in a lawsuit; however, because the LLC is acting as the landlord, your personal assets are protected. The party that is suing may only go after the assets held in the LLC. Thus, if you have several properties, you may want to have a separate LLC for each property for added asset protection. Keeping each property in separate companies will further limit the assets that are vulnerable in a given lawsuit involving one of your properties.
As your estate planning attorney, we will support and assist you with creating and maintaining your LLC, funding your trust with your business interest, and adhering to formalities to keep you protected. In fact, we offer specially designed maintenance packages to help ensure your estate plan and business meets requirements and maintains the maximum level of liability protection for your personal assets. Contact us today to schedule your free planning session.