Legal Question in Landlord & Tenant Law in California
I own three small rental properties. Is it better to form an LLC or have a large liability insurance policy?
2 Answers from Attorneys
Depending on tax considerations, probably insurance. When you transferred the properties into an LLC or a corporation, it would trigger a Prop 13 tax reassessment to market value. Of course if they are worth less than when you bought them that might be a good thing. Also, if you do put them in a business, an LLC may be a tax dis-favored way to hold them compared to an S-Corp. Bottom line is there are a lot of considerations that you should probably go over with a knowedgable real estate business attorney.
Coming from some one who is in the business of suing people who are negligent and careless, protect yourself and your assets with liability insurance but in an amount consistent with your needs. An LLC will not protect you and put your assets at risk. Also usually for a small price once you get liability insurance get an umbrella policy. You can get $1 mil plus umbrella rather cheaply. So at the end of the day if God forbid something happened to one of your tenants or their guests you would not have to worry about getting judgment against you and losing your assets. Also your insurance carrier would provide a defense so you wouldn't have to defend yourself which usually results in disastrous results.
So do yourself a favor and contact a reputable independent insurance broker to discuss your needs.