Placing Rental Properties Into LLC
Ask the Real Estate Lawyer: Real Estate Law Q&A
REM #LAW 750
By Ilyce R. Glink and Samuel J. Tamkin
Summary: A ThinkGlink reader owns
12 rental houses and is setting up 12 separate LLCs. Ilyce and Sam explain why
this complex arrangement may not be the best idea for this real estate investor.
Q: I am in the process of putting each of my 12 rental houses (I'll call them
A, B, C, etc) into their own individual limited liability companies. When I’m
done, I’ll have 12 LLCs with one rental property in each one.
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I’m doing this in order to protect myself from a future lawsuit. My mortgage
companies have given me approval to do this and won’t call my loans.
But I’m wondering what happens if I were sued by a tenant in House A,
and they win a $10 million judgement, would the rest of my properties be protected
from paying that bill?
A: The short answer is if you personally are sued and the judgment is against
you, none of your houses are protected the way you have set them up. However,
if LLC “A” is sued and the tenant has a judgment against LLC “A”
for $10 million dollars, it is unlikely that the tenant will be able to recover
the judgment against you or against the other LLCs.
You need to make sure each of your LLCs is properly organized and that each
is operated independently. If you end up taking short cuts and the appearance
is that all of the properties are operated by the same person, from the same
bank account and there is no appearance to the public or third parties that
ownership of these properties differs, you may find that a clever litigator
will be successful in claiming that you failed to carry your business as 12
separate businesses and that the plaintiff is entitled to go after all of the
When you set up the companies, make sure that you have documentation for each
one. If you intend to have a management company operate all 12 properties, you
may want to hire separate management companies for each of the properties and
make sure that all documents are signed by the management company as the manager
of the property on behalf of each respective owning company.
You also need to make sure that any documentation that goes out to tenants
is from the management company on behalf of each owning entity, as opposed to
you as the singular landlord.
In essence, you’ll need to treat each company as a separate and distinct
entity. You’ll need to have separate books and records for each of the
companies as well.
If you have not already done so, you may want to sit down with an attorney
to review the corporate structure as you have set it up and make sure it works
for you. In some cases, the paperwork that goes into setting up all of these
companies can outweigh the benefit served by corporate set up, particularly
if the properties are small.
What have you done about insuring against a potential liability? You should
make sure you have a good insurance policy in place that can cover most liability
Obviously, breach of lease issues may not be covered by your liability insurance
policies, but if someone is injured on one of your properties, that should be
covered by the policy.
NOTE: This column is distributed by Real Estate Matters Syndicate,
PO Box 366, Glencoe, Illinois, 60022. This column may not be resold, reprinted,
resyndicated or redistributed without written permission from the publisher.