forming an llc for a rental property

Just tell your insurance agent that you will be changing your property to a rental property and they will take care of adding the correct riders to your policy. They are very used to it here in NYC, not a big deal.

What an LLC does is

1 - Allow you to write off expenses legally (assuming your declaring rental income)

and
2 - More importantly protects you personally if someone is injured or killed on the property. Otherwise someone can sue you and go after your personal assets.

That's what w67 likes about apple. 3% yield. Huge upside. And no worries about rising rates. As 10% interest means apple earns $15B in interest income... your prepaid rent ETFs will suffer a little bit of a loss if mortgages hit 10%... but don't worry the rates will come with stronger economy and all renters will be able to pay the 100% increase in owner's interest payments...

Carry on.

Cheers to "dwell".

What my "LLC does is":
allow me to maintain my privacy from the drunken streeteasy trolls.
They can rant and rave on streeteasy but they will never find the details of my RE purchases in the public record. I purchase with all cash.

The mistake of allowing them to know my real-life name has been corrected by the privacy of buying RE registered under an "LLC".

I think as long as your have sufficient personal liability coverage - you dont need to change it to an LLC. Also depends how many units you are renting out in the building.

It's a townhouse....would rent out the whole house and have a property manager to manage the house/shovel the snow, etc.....therefore liability is high. How much personal liability would you recommend?

How many units are you renting out? Or is it renting one unit/to one family i.e. entire house?

Renting whole house to one family....entire house

Make sure you have enough personal liability coverage = your total net worth.
If anyone sues it is for what you have/own, so make sure you have that.

You can switch to LL policy, but if your limits aren't high enough to cover the injury, then the PI atty will go for your home/car/other assets - anything to cover the amount not covered by the insurance.

if you want to completely shield yourself personally - meaning the PI atty can only go to the assets of the LLC and nothing of your personally - then forming (and adhering to the formalities required of such) is a must......the process is what trips most people up.

form the LLC; don't forget to publish per NY rules - total cost depending on borough (1k); cost also depends upon whether you use an atty to form or legal zoom - either works, but legal zoom will miss the nuances that an atty will pick up on.

once the LLC is formed, you need to quitclaim from yourself to the LLC and have such properly recorded. NY has easy transfer process for this - however the catch is that you will be in technical default on your note per its 'due son sale clause' where the bank can accelerate the note if/when the property is transferred. transferring to an LLC qualifies as this. there' slim chance your bank will allow this, but if they don't then it's also likely they are not going accelerate a note that is performing an paid on time.

from tax perspective you get to write off the rental income and mtge interest whether an LLC or not. you also get to depreciate the asset...sometimes this results in a loss that if you are a RE professional per the tax rules (basically only if you are a RE broker or agent) then you get to apply the paper loss against your income (big benny here).

anyway - there's lot more...but the basic gist is that if you want to completely shield your personal assets, then an LLC is a must.

Be careful, the state changed tax rules this year to tax investors at a higher rate (technically, stop a subsidy). If you own the unit in your name may be able to avoid the increase but 0% chance of avoiding if owned as an LLC.

Separately, LLCs provide some protection against liability. Negligence, etc. can immediately pierce that. For instance, if you have an illegal washer/dryer and there is an apartment fire your goose is cooked LLC or no LLC.

Don't use legal zoom as they will not advertise the formation in NYC for you. Many attorneys in Albany specialize in this and it is a commodity business. They are near the statehouse and pay albany newspaper publishing rates. Try Gerald Weinberg or someone like that.

"Separately, LLCs provide some protection against liability. Negligence, etc. can immediately pierce that. For instance, if you have an illegal washer/dryer and there is an apartment fire your goose is cooked LLC or no LLC."

That's just a flat-out incorrect statement. There's not per-se cause for piercing of the corporate veil. And to say simply that 'negligence can immediately pierce the veil' is bad bad advice.

Generally,, if you adhere to the formalities of the LLC; the LLC owns the asset; and the lease is by and between the LLC and the tenant then the injured would have a hard time piercing the LLC's corporate veil....also the fact that you may use a management company is good, as well. You are distancing yourself personally from the property. Maybe if you came in and tried to fix the washer yourself and f'd it up, then maybe there's a case to pierce the veil....but even that would have to be argued and the burden would be on the injured.

Also not sure the tax rule change - maybe nycfund can provide the source. In the end you'd have to balance the higher cost from a tax standpoint against the added protection your LLC provides. If you have significant personal assets and your tenants are higher net worth (meaning in a severe PI case, their life is worth millions in judgement dollars) then you would be severely remiss to not operate under a corporate veil of some kind.

CondoPresident, might I suggest using Google before you come after me?

This took me about 20 seconds:

http://www.clm.com/publication.cfm?ID=386
"As for negligent conduct, a manager of an LLC may be held personally liable for approving, directing, actively participating in, or cooperating in the company’s negligent conduct."

LLC tax change
http://www.nytimes.com/2013/03/26/realestate/tax-abatement-changes-affect-many-unit-owners.html?pagewanted=all

NYCFund you are giving bad advice to state that there is a tax increase from being an LLC. The increase you are referring to is the abatement that homeowners who use the unit as their primary residence are entitled to. If you purchased the home as your primary residence and used an LLC then you are correct the individual would lose their abatement.

In this situation we are talking about a rental property and the use of an LLC. In this case the LLC does not have anything to do with the abatement since they are not entitled even as an individual. In addition I believe the facts are that this is a townhouse which does not have this abatement anyway.

And from a tax standpoint assuming this is a single member LLC it would flow directly onto the personal tax return without the necessity to file a separate return for the LLC and would be reported as if it was owned directly.

Took you 20 mins to cite CO law. Solid work if we were in Colorado. Hoang v. Arbess, 80 P.3d 863, 868 (Colo. App. 2003).

Also if you really understood what I said, which is there is no per se piercing of the corporate veil...meaning the other side will always have to argue, you would realize your statement STILL is incorrect. Also you would see that I agree with the general proposition whether it's NY law or not, that personal involvement is always factor that could lead to piercing of a corporate veil.

Also - the asset here is a townhouse....condo/coop abatement doesn't apply. But nice try on that one too.

You need to speak to a tax person about the potential tax effects (how expenses are deducted and the various recordkeeping and filing requirements, possible changes to NYC taxes, etc.), a lawyer about how shielded you would be under various scenarios (particularly if the LLC is renting the property, but you're retaining ownership of it), your bank(s) (mortgage + lines of credit) about the change in recorded owner of the property (since if you have a mortgage or line of credit they are first lien holders), and your insurance company, since the use of the property is changing and such use may not be covered under your current policy.

Since you're considering renting the entire townhouse, assuming it's in NYC, it will probably cost you about a month's rental income for the professional fees.

Re: the corporate veil, it could cost you as much to prove you're not liable as to be found liable.

E.g., there's The Mattone Group here on SE touting the Azure, while in court it tried to claim it has nothing to do with it: http://therealdeal.com/blog/2013/04/17/judge-denies-developers-bid-to-toss-azure-crane-collapse-suit/

CondoPresident - "A+" on wearing the reader out. As far as advice - "F". I am saying LLC's are far from bullet proof and there are reams of google-able data to support such a claim. I am urging caution. You are saying that is "bad bad advice"???? As far as the specifics, you are all over the place and too verbose. What is your bottom line?

Regarding the tax abatement, take a few deeps breathes and calm down. Then read the article. Your anger is affecting your literacy.

You are urging caution against shielding your personal assets from a business asset fraught with potential liability....and you are supporting such with blanket generalizations without explanation or nuance. Yes! That is bad advice!! hahaha.

And I really don't follow you on the condo/coop abatement law changes arg....again, it's a townhouse.

My bottom line has been clear from the beginning "if you want to completely shield yourself personally - meaning the PI atty can only go to the assets of the LLC - then forming the LLC (and adhering to the formalities required of such) is a must."

Again - 'completely shield' is dependent upon 'adhering to the formalities'. The alternative is to not even give yourself a chance at a shield and rely on what could be insufficient limits on a personal LL policy.

"Completely shield" and "LLC" do not belong in the same sentence. You are providing reckless + terrible advice likely to do more harm than good. Anyone reading this should invest in insurance and take the protections of a LLC very lightly.

I'm sure Johnny Cats thought he was completely shielded too.

http://www.nypost.com/p/news/local/cats_on_hook_for_gristedes_worker_12Oizh7ShLnpIPq1My6tYM

redistribution of wealth underway

If you think you are saving money to form an LLC, no, it will not because it costs extra to do paperwork, file tax returns and the tax rate of LLC may be higher than your own personal tax rate.

cbreeze that only holds true if it is a multi member LLC. If a single member it will not need a separate tax return. In addition, I have zero idea what you mean by different tax rates as whether or not the LLC has to file a return it is still a pass through entity. Whether there is a taxable income or not will be the same in either scenario and the tax rate is your own.

the fee difference would be the costs of originally setting up the LLC and if it is more than a single member LLC then the cost of filing an additional return each year.

LLC won't save you from any liability. But exactly what liability are you concerned about? Slip and fall? Get insured.

Wow, thanks for all the responses. All types of liability.....slip and fall on the sidewalk in front of the house, or the tenant possibly hurting themselves inside the house or in the backyard.

If you want to hire a third party to handle all matters related to the apartment, maintenance, rental, rent collection, etc., then there's someone in between.
Instead, just get properly insured. And minimize risks - clear the side walk, fix the stairs, clear the backyard.

LLC is a pass through entity for tax purposes, that's biz organization 101, let's please not argue about that. C-corps and S-corps are different, but S-corps are not much different from LLCs in New York, just a little more paperwork.

I own rental properties and I wouldn't do it except through an LLC. I like sleeping at night.

I also don't sky dive. Other people just have a higher tolerance for risk. The corporate veil is not perfect, I'm sure, but it's something.

As a practical matter: It's rare to have any claim/lawsuit against you as a landlord. It's rarer still for the claim to exceed your insurance. Even if you have insurance, your company may not want to pay or you might have to sue your insurance company to get paid. Insurance companies aren't as much fun as they used to be.

The most likely lawsuit you'll be in is to sue your tenants for rent or property destruction.

As a practical matter: It probably doesn't matter which you do. It is a little harder to get insurance if the property is owned by an LLC, we've been turned down specifically for this reason. I've had good luck with both Nationwide and State Farm however and they cover my properties with "Landlord Package" insurance which is what you want.

The property managers I work with mostly have clients who have *not* established an LLC for their properties. I know this because the prop managers keep forgetting that I have an LLC.

Pro landlords set up an LLC for each property, or each couple of properties. They don't think twice about it.

Being in an LLC might, might, slow down a plaintiff's attorney. I know they always look for insurance, which they know you have, either way.

I really like the idea of using an Albany lawyer to set up your LLC, save a lot on start up costs.

Can anyone recommend a good Albany lawyer?

I use this firm: http://www.weinbergpc.com/

NWT: How true.
Good comment and link.

"As for negligent conduct, a manager of an LLC may be held personally liable for approving, directing, actively participating in, or cooperating in the company’s negligent conduct.

No - you are wrong. Simply being a manager of an LLC that is negligent will not lead to personal liability. In addition, there is a difference between the manager of an LLC and a member (owner) of an LLC. While often times, small LLCs are managed by the member(s), this is not always the case.

I don't know what the law is in Colorado or some other fly-over state but in New York and Delaware your statement is simply not true. Any law school graduate can tell you this. While there are situations where the members (owners) of an LLC may be held personally liable for the obligations of the LLC, those generally involve situations where the formality of the LLC is not observed or where the members mix their personal dealings and those of the LLC. If you properly form and document and LLC and then follow the relevant statutory and governance procedures, it is very very unlikely an owner (member) will be held personally liable for the obligations of the LLC. Pay a lawyer a few thousand dollars to properly document the LLC and give you some basic advice and you should be fine.

Having said all that, as others mentioned, if you have an underlying mortgage on the property, you need to make sure you don't have an issue when you transfer the property to the LLC (to be honest, I would be surprised if this did not present an issue for you - you will almost certainly need to involve your lender in the discussion). Bottom line is contact an attorney that specializes in representing owners of small rental properties and he/she should be able to give you good advice on the best way to shield yourself from personal liability and protect your assets. It's not overly complicated but each situation is slightly different. While legalzoom will allow you to form your LLC, it won't provide any advice specific to your situation which is what you need.

Try reading the New York Limited Liability Company Act instead of some no name law firm's website in Colorado.

(a) Neither a member of a limited liability company, a manager of a limited liability company
managed by a manager or managers nor an agent of a limited liability
company (including a person having more than one such capacity) is
liable for any debts, obligations or liabilities of the limited
liability company or each other, whether arising in tort, contract or
otherwise, solely by reason of being such member, manager or agent or
acting (or omitting to act) in such capacities or participating (as an
employee, consultant, contractor or otherwise) in the conduct of the
business of the limited liability company.
(b) Notwithstanding the provisions of subdivision (a) of this section,
all or specified members of a limited liability company may be liable in
their capacity as members for all or specified debts, obligations or
liabilities of a limited liability company if (l) a statement to such
effect is specifically contained in the articles of organization of the
limited liability company and (2) any such member so liable shall have
(i) specifically consented in writing (A) to the adoption of such
provisions or (B) to be bound by such provision or (ii) specifically
voted for the adoption of such provision. The absence of either such
statement in the articles of organization or such consent or vote of any
such member shall in no way affect or impair the ability of a member to
act as a guarantor or a surety for, provide collateral for or otherwise
be liable for, the debts, obligations or liabilities of a limited
liability company as authorized pursuant to section six hundred eleven
of this article

So, Downtown, please go back to my original example: You own a rental. You installed an illegal washer/dryer. It starts a fire. The tenant is seriously hurt from the fire. Add assumption that you hired the best lawyer in NY to set-up the LLC... How nervous are you?

So long as I observed proper governance and didn't mingle personal and LLC assets? Not nervous at all. It is very very difficult to look through an LLC to the members/owners so long as they follow proper governance.

Having said that, I will still have extensive insurance (general liability and umbrella) at the LLC level.

Standard tort law is that an individual human being who actually creates an illegal or dangerous situation that injures someone is personally liable for the damage they cause. Their employer is ALSO liable.

If "you" installed the dangerous and illegal W/D (or "you" directed someone else to), you are responsible for your own actions.

The LLC, which owns the place and let you do this, is responsible for its actions, too.

The victim can sue you and the LLC and collect from whichever is easier.

The issue of looking through the LLC won't ever arise.

Financeguy, nice work making the LLC irrelevant. Downtown, time to turn in your commenting license.

Of course, if the LLC owns the property and competently delegates management to a professional manager, then you won't have done anything that could generate liability, even if it turns out that the manager is less professional and competent than it seemed to be. The LLC is probably liable for the manager's mistakes, since the manager is its agent. But if the LLC goes bust -- if it or its agents cause damage greater than the value of the property -- the LLC's owners can walk away without taking responsibility for the damage they've done.

The key is that you need to avoid making bad decisions and, instead, allow someone else to do it.

On the other hand, if you believe in personal responsibility, you might consider taking out an insurance policy and managing your place responsibly. That also works.