A limited liability company (LLC) offers many advantages as a business form, but perhaps none is more critical than shielding its owners from personal liability in the event that the business is sued. If you are looking to invest in real estate, then protecting your personal assets should be a priority. At Startup Company Counsel, our San Jose real estate attorneys routinely advise clients about how to smartly invest.
Sole Proprietorship vs. LLC
Small businesses often operate as sole proprietorships. The business owner will use their Social Security Number and report any income from the business on his or her personal tax return. However, there is no legal distinction between the sole proprietorship and the business owner, which means that the business owner is personally responsible for all business debts and obligations. For example, if the business owner signs a lease, he or she is personally responsible for covering the cost of the lease even if the lease was for the company.
The same is true if you enter a partnership with other people. Legally, the partners will be liable for all partnership debts and financial obligations of the partnership.
An LLC, by contrast, is a legal entity separate and distinct from its owners. This is beneficial to the owners of the LLC in that it shields the owner’s personal assets in the event creditors or injured people bring lawsuits against the business. Although the company’s assets will be exposed, an owner will generally be protected from losing their home or their retirement savings.
Liability and Real Estate
As a real estate investor, your company could be sued in a variety of situations:
- Someone is injured on the property and brings a personal injury lawsuit
- An employee, like a property manager, sues for the violation of workplace laws
- A lender sues on a loan
- A person who does improvements on the property sues for non-payment
In each of these situations, an LLC will help to shield your personal assets from a creditor or injured plaintiff. Instead, the person suing you will likely only be able to get company assets if they win the lawsuit.
Forming an LLC Properly
Because an LLC offers important legal protections, some owners may attempt to form an LLC but not set-up or operate it properly. In these situations, an injured party may ask the court to “pierce the veil” and allow them to reach through the LLC and attach the owner’s personal assets. For example, someone who comingles their own assets with an LLC’s assets is at risk of having the LLC disregarded by a court.
For these reasons, you need an experienced San Jose real estate attorney to help you form your LLC the right way. Doing so will help you understand and utilize all the advantages the LLC has to offer while insulating you from lawsuits.
Talk to a San Jose Real Estate Attorney at Startup Company Counsel
Forming a business is more complicated than many people realize. Critical errors can compromise your company’s livelihood and your financial security. To start the process of forming your LLC, please contact us today by calling 408-441-7555 or by sending us an email.