Legal Question in Business Law in California

Re: LLC or S subcorporation

This is a possibility, and for sure many owners of investment properties, especially rentals, use LLCs or S corporations to give themselves partial protection against liability.

However, there is a long list of factors to consider before jumping to a conclusion that it's a good idea.

First, what kind of liens? Pre-existing liens won't be affected, nor will forming an entity afford protection against judgment liens where the LLC or corporation was a losing defendant. Further, transferring property to an LLC or corporation to try to shield it from a creditor or potential creditor may be a fraudulent transfer, which could be un-done under the Uniform Fraudulent Transfers Act.

Transferring property from personal to entity ownership may have a tax effect, now or later. Most transfers to entities for fair value have no immediate tax impact, but this should be checked with a tax expert. Also, a change of owner may trigger reappraisal and loss of a lower Prop. 13 protected assessment.

Corporations and LLCs pay minimum franchise tax of $800 a year. That will buy a lot of liability insurance. Plus, there is the hassle and expense of keeping books and filing additional tax returns.

These are just a few of the factors that might weigh on the decision. It takes a fairly large degree of general business, tax and legal savvy to make a wise decision, and most of the decision criteria require personal knowledge to weigh properly.

Bottom line is that one would need to know the type of liabilities feared, and why, to decide whether LLC/S corp., more insurance, or something else is a viable answer. It could be that your aunt is just too timid or too risk-averse to be a landlord, and should sell and put her money in government bonds.

Re: LLC or S subcorporation

Once there are liens or claims against her and her property, its too late to change. If not, then putting into a trust or properly transferring it to some corporate or limited liability entity might be done. But liens imply claims or a judgment against her, which won't go away. She needs proper legal advice, have her contact me if interested in getting it.