Landlord Tools: Legal Protection
As you invest in property, it is important to protect yourself legally by keeping your investment properties separate from your personal assets. You can do this by creating companies to hold and manage property to reduce your personal liability for business debts or legal claims.
Entity creation
Numerous accountants have recommended forming a Limited Liability Company—or LLC—for holding and managing real estate. The LLC is a flexible, simple-to-operate entity giving the liability protection you need while also providing taxation benefits. The way it works is that all of the LLCs profits and losses flow through the entity to your personal tax return, avoiding corporate tax or money allocation constraints of corporations. To create an LLC, file Articles of Incorporation with the Secretary of State, and apply for an Employer Identification Number—or EIN—from the IRS (Form SS-4). Both can be applied for online. You will also need to file Form 8832 for an Entity Classification Election from the IRS. The links for all of these are below:
Colorado Secretary of State:
http://www.sos.state.co.us/biz/FileDoc.do
File a new record. Under Domestic Entities, click on File articles of organization for a limited liability company.
Internal Revenue Service:
EIN Application http://www.irs.gov/businesses/small/article/0,,id=102767,00.html
Form 8832
http://www.irs.gov/pub/irs-pdf/f8832.pdf
For an LLC you would select:
1. Type of election: a. newly formed entity
2. Form of entity: b. domestic eligible electing to be classified as a partnership
List your title as Member or Manager
Once you have received your EIN and have your Articles of Incorporation lodged and recorded, you will want to get a separate bank account and possibly a credit card for all transactions relating to the business. This will help with keeping good records, and also keeps the LLC separate from your personal accounts—which is an important factor in maintaining the desired legal protection.
Property Ownership
Once your investment property is purchased (it will need to be in your own name), you can quit claim the property to your LLC using the form in this website. This way, your LLC actually owns the property rather than you, providing legal protection in the case of a lawsuit.
The form requires that you provide the legal description and parcel number of the property. For Denver properties, this information can be found by doing a Real Property search at http://www.denvergov.org. Tax and assessor information is also located here.
Insurance
For further personal protection, it might be a good idea to get an umbrella policy, though this is not necessary if you have created a separate entity for your properties as described above. Talk to one of the insurance agents listed on the recommended vendor list on page 22 for more information.
It is also a good idea to require that your tenants carry renters insurance on the units they rent, naming you—the landlord—on the policy as an additional insured party. The costs for renters insurance is minimal for your tenants (around $150/yr) and will cover liability issues that protect you as the owner.
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