Avoid These 5 Common Mistakes That Can Jeopardize Real Estate Investor's LLC Protection
Utilizing a limited liability company (LLC) to hold real estate investments is a popular choice among real estate investors. An LLC provides liability protection, tax advantages, and organizational flexibility. However, certain mistakes can inadvertently undermine the protection offered by an LLC. In this article, we will discuss five common mistakes real estate investors make when holding real estate in an LLC that can potentially destroy their protection, and how to avoid them.
- Not Having Separate Bank Accounts: One of the crucial mistakes many real estate investors make is failing to establish separate bank accounts for their LLC and personal finances. Commingling funds can pierce the corporate veil, exposing personal assets to potential liabilities. By maintaining separate bank accounts, you maintain the legal separation between your personal and business finances, preserving the liability protection provided by the LLC.
- Signing Leasing Agreements in Your Personal Name Instead of on Behalf of Your Business: Another critical mistake is signing leasing agreements in your individual name instead of as an officer on behalf of the name of your LLC's. This error can expose you to personal liability and negate the protection offered by the LLC structure. Always ensure that lease agreements and contracts are executed in the name of the LLC, clearly indicating that the LLC is the owner of the property and protecting your personal assets.
- Not Planning for the Future: Failure to plan for what happens to your real estate investments upon your death is a significant oversight. By setting up a trust, you can effectively transfer ownership and management of the properties seamlessly, while maintaining the LLC's liability protection. A trust ensures a smooth transition of assets and enables you to dictate how your properties will be managed and distributed, even after you pass away.
- Not Adding the LLC to Insurance Policies: Insurance coverage is a crucial aspect of protecting your real estate investments. Neglecting to add your LLC as an additional insured party on insurance policies can leave you vulnerable to potential claims. By adding the LLC to your insurance policies, you extend coverage to the properties held within the LLC, safeguarding both your personal assets and the LLC from liabilities arising from property-related incidents.
- Not Creating an Operating Agreement: An operating agreement is a fundamental document that outlines the internal workings and governance of the LLC. Neglecting to create an operating agreement can lead to confusion, disputes, and even legal challenges. This oversight can jeopardize the LLC's protection and expose you to personal liability. An operating agreement clarifies member rights, responsibilities, profit distribution, and decision-making processes, ensuring smooth operations and protecting your investment.
When holding real estate investments in an LLC, it's crucial to avoid these common mistakes that can compromise the protection offered by the entity. Establishing separate bank accounts, signing agreements in the LLC's name, planning for the future with a trust, adding the LLC to insurance policies, and creating a comprehensive operating agreement are vital steps to protect your assets and mitigate risks. By seeking guidance from legal and financial professionals, you can navigate these aspects effectively and secure the long-term success of your real estate investments within an LLC structure.If you are ready to take the next step to protecting your family with a comprehensive estate plan, Law Mother: Asset Protection and Estate Planning provides a complimentary 15 minute call. Please visit Lawmother.com/go to schedule your call. During this call we will answer your questions, explain our process and get you scheduled for the next step.