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Why it isn’t that expensive to form a separate LLC for each property and why to do that

Date: 02/18/2017 | Category: Business | Author: Jakub Vele

All investors want to protect themselves and their properties. Everyone has heard the following example: someone slips on some ice in front of your house, then sues you for thousands of dollars. In a blink of an eye, you can lose everything you have been building and saving for a long time. That is why it is smart to think about protecting your property in the case of something like this happening. You can do this by forming a separate LLC for every property you own. However, you may also have heard that this option is costly and can be replaced by liability insurance. Let us look closer at this principle and why it is not that costly.

The idea of having separate LLC for every property is very simple: If you have each property under a separate LLC and somebody sues you for a million dollars because he slipped on the ice in the front of your property, the worst that can happen is that you will lose that property. Because he will be suing an LLC ,which owns only that one property, that is the only thing that can be used to compensate the injured party.

But let us say you own five properties, each worth $300,000.  Additionally, let us say they are all under one LLC. We will use the example from the first case – somebody sues you for $1 million because he slipped and injured himself in front of your property. As in the first instance, he will sue the LLC which owns the property, but now that particular LLC also owns another four properties. What will happen if you lose the lawsuit? You can either sell three (worst case scenario all four) properties for a total of $1 million and pay the injured person, or you might settle on giving him two or three of the properties instead. Either way, this situation could have been avoided if you had each property denoted under a separate LLC. Some people like to argue that this option is expensive, but before crunching the numbers, I want to reflect upon one more scenario.

What if you owned those properties not under an LLC, but under your own name instead? If somebody sues you for $1 million and your properties are only worth $500,000, you may also lose your house, car, and all other valuable assets

It’s time for some math, in order to prove that making a separate LLC for each property is not as expensive as some would like to believe.

Let us say you have 5 properties, and you make $20,000/year on each of them. Setting up an LLC and submitting all the necessary documents will cost you $400 – $1200, depending on the state you live in. Then there are annual costs, which are typically around $500. You also do not need a separate address for your LLC – it can be your own property. In the most expensive case, it will cost $2,000 for the first year and $1,000 for every other year thereafter. So your net profit each year will not be $20,000, but $19,000 on each property, and when we sum it all up, you will make $95,000 instead of $100,000. That is the price of reducing risk – and keep in mind that we have calculated this with a $1,000/year LLC fee, which will most likely be much lower.

If you are now considering this option, we at IncParadise, one of the biggest incorporation companies in the United States, will be happy to assist you. We have great customer reviews and extremely low fees! Contact us today!