The Limited Liability Company (LLC) is a popular tool for real estate investors to protect their personal assets. It essentially forms a wall that shields an individual's own assets from any liabilities related to the investment property. In short, if you happen to be sued by a tenant, vacation renter, or property guest for something that happened on the property, the LLC will protect your own personal assets.
I'm often asked if the same rules apply for multi-investor arrangements. Namely, is the LLC the right business structure when multiple investors share ownership of a property?
The short answer is absolutely. In fact, the benefits of the LLC are even stronger in these multi-investor situations. And this is true whether you join a ‘ real estate investment club' or you purchase a property with a group of friends or family members.
Without forming an LLC or other entity (like a Corporation), investors are automatically considered partners. This means that you, as an individual investor, could be liable for actions of the other partners.
By forming an LLC, you're sure to shield your own personal assets (other properties, savings…) from any liability settlement.
In addition, the LLC offers a lot of freedom in how you want to manage the property, and this flexibility is particularly important when multiple investors are involved. In the LLC's operating agreement, you can explicitly define and limit the rights and obligations of all involved. And even if you're purchasing a vacation home with a few of your siblings, having a legal contract that sets the rules upfront will minimize any confusion or conflict in years to come.
And unlike the Corporation, an LLC requires minimal corporate formality, so you won't have to worry about holding annual meetings and filing resolutions for every little change.
Forming an LLC is very affordable and hassle-free. Taking a little time upfront to set up an LLC can save you significant dollars, headache, and heartache should something happen down the road. Just remember, the same rules that pertain to the individual investor apply in even greater force when an investment is shared.