Anyone owning rental properties, whether in Nevada or another state, should seriously consider holding their properties in a Nevada limited-liability company (“LLC”). Why? Asset protection. You can never be too safe.
Nevada LLCs offer perhaps the strongest asset protection benefits in the nation. They are easy to set up and to use and can provide a great deal of security and peace of mind for their owners.
Asset Protection. So how do they work? Let’s say you own a rental property and hold it in your name or in your living trust. Your tenant is injured on the property (or claims to have been injured). What happens? You get sued. If the tenant wins, he or she can come after you personally and attach any or all of your assets. Your living trust, if you have one, does not provide any asset protection.
The good news it that you don’t need to unnecessarily expose yourself and all of your assets. You can easily set up a Nevada LLC and transfer your property into your LLC. Your LLC not only protects you from any claims by a tenant but will also protect your property from anyone coming after you personally.
You are protected because the property is owned by your LLC, not by you. Your LLC will also shield your property from any claimants coming after you individually. For example, if you are in a car wreck and someone sues you, he or she cannot attach any assets held in your LLC.
Contrast with Corporations. If you held your rental in a corporation, your creditor can attach your stock and thereby gain complete control of your corporation. He can then dissolve the corporation and gain control of all assets in the corporation.
The result is exactly opposite for LLCs – your creditor has neither access to any assets nor control of the entity.
Charging Orders. Under Nevada law, the only remedy a creditor has is a “charging order.” This is essentially a lien on your ownership interest in the LLC. Your creditor cannot (1) attach any assets in the LLC; (2) force you to distribute any assets; or (3) dissolve the LLC (pull down the protective barrier). Your creditor is limited to sitting idly by and waiting for you to make a distribution, which, of course, you’ll never do.
Better yet, IRS Rev. Rul. 77-137 states that a creditor who has attached your interest steps into your shoes for tax purposes. This means that if you have any taxable income, you retain the money in your LLC and issue a K-1 to your creditor. He reports the income, not you! This is sometimes referred to as a K-O by K-1.
Tax Issues. Another benefit of LLCs is that they have the greatest flexibility for taxes than any other entity. Essentially, you can have your LLC be taxed any way you like.
Disregarded Entity. Perhaps the simplest and most popular option for your LLC is to have it be a “disregarded entity” for IRS purposes. Your LLC is “invisible” as far as the IRS is concerned. You don’t even need to file a tax return for the entity. You simply report all income and losses directly on your IRS Form 1040 as if the LLC didn’t exist. This ease in tax reporting does not affect the strong asset protection offered under Nevada law.
S Corporation. You can also elect to have your LLC taxes as a corporation and then file an S election for it. An IRS Form 1120S is required if you make an S election for your LLC. Under certain circumstances, S corporation reporting can offer you tax benefits.
I recommend that you discuss with your accountant the best option for you in your tax reporting for your LLC.
Non-Nevada Residents and Non-Nevada Properties. Do you need to be a Nevada resident to own a Nevada LLC? No.
Do you need to maintain a Nevada business address to own a Nevada LLC? No. All you need is a registered agent in Nevada. Any person or entity can fill this role for you.
Can you own property outside of Nevada in a Nevada LLC? Yes.
Insurance. Won’t insurance cover any claims? Hopefully, yes.
However, if the particular claim is not covered under your policy or if the claim exceeds policy limits, you will be personally liable. Series LLCs. What if you own multiple properties? Nevada has the ideal solution –series LLCs. Nevada has a wonderful new entity, a series LLC, which lets you create as many different series or compartments within your LLC as you care to set up. Each series operates as a separate LLC for asset protection. For example, if you own three rentals, you can set up one series LLC and create three different series within the LLC, one for each rental. If something bad happens on one of the properties, the other two are not affected.
With a series LLC, you only pay one filing fee to the state to set up the LLC and only one annual fee to renew it, regardless of how many series you have. If you are filing a tax return for the LLC, you can avoid having to file multiple returns.
For most people, holding properties in an LLC is simply a prudent way to protect yourself and your properties from the unexpected and unknown. It’s a relatively inexpensive way to provide excellent asset protection benefits. Many view it as “sleep insurance”, meaning that you can rest assured knowing that no matter what may happen to you or your properties, you and your assets will be safe.