Corporations and limited liability companies (LLCs) provide their owners liability protection. An owner is generally not personally liable for the debts, obligations or other liabilities of these entities. Thus, virtually all businesses are legally formed as corporations or LLCs.
Suppose your business is a corporation, and it has been renting its facility for years. It now has the opportunity to purchase the facility. You know you want personal liability protection from any injuries which may occur at the facility, so you know you do not want to personally purchase it. Should you have the corporation buy it?
A better idea is to form a new LLC to purchase the facility, which would rent the facility to the corporation. Why is this a better idea?
Presumably your successful business (the corporation) has value. You would like to protect that value from liabilities which could fall upon the owner of the facility. For instance, if someone gets injured because of a failure to maintain the parking lot that injured party may sue the parking lot’s owner. While liability insurance is the first protection for the parking lot owner, there could be scenarios where the injury is serious enough that your insurance limits are exceeded. If the owner of the parking lot is a separate LLC, and the injured party can successfully sue the owner of the parking lot, then that new LLC is at risk. However, you would not only have personal liability protection for yourself, but you would also have liability protection for your corporation (presuming your corporation was not responsible for maintaining the parking lot).
Or, let us suppose you have two children attending the same college. You decide to purchase an off-campus house near the college where your children and some of their friends can live. Hopefully you will create an LLC to purchase that house, and give you liability protection from the endless possibility of injuries which can occur when your son decides to host a party.
Suppose you find that being an owner of a rental house to college students is financially successful. You decide to buy two more houses near the campus to use for off-campus rental housing. Should you have that LLC purchase those two houses as well?
A better idea would be to establish separate LLCs for each rental house. Why? Let’s suppose an injury occurs at house #3, and the owner of house #3 becomes liable. If you just have one LLC owning all three houses, that LLC will have all the liability. All three rental houses (owned by the same LLC) are essentially at risk to pay the liability for the injury at house #3.
On the other hand, if house #3 is owned by LLC #3, then only LLC #3 is at risk. The separate LLCs which own houses #1 and #2 will not have any liability for an injury which occurs at house #3. Thus, you will have preserved the equity in houses #1 and #2.
Menn Law Firm regularly advises clients on liability protection. For further information on this topic please contact Attorney Doug Hahn at firstname.lastname@example.org or at 920-731-6631. All of Menn’s attorneys may reached at 920-731-6631.