How Can Owners of Rental Properties Limit Liability?

A significant number of my clients have rental properties. Many are casual landlords with just a few rental properties. Others have dozens of rental properties. In both scenarios, the owner of the rental properties can take some common sense steps to limit liability and protect their assets.

First, the landlord should obtain adequate insurance. Our main concern here is with liability insurance. Often my clients select policies that have liability insurance of at least $500,000.

Second, the landlord should form an LLC for the rental properties. In Missouri, LLCs are very cost effective ways to do what its name says, limit liability of the owner. Yet, too many individuals have LLC with sloppy or amateur Operating Agreements. Yet, when it comes to asset protection, having a carefully crafted Operating Agreement is the smart way to maximize the protection of your assets and minimize your personal liability.

In 2013, Missouri passed legislation allowing the creation of a new type of LLC, a Series LLC. Because it is new, there remain several unanswered questions about Series LLCs. Yet, the basic premise is promising for landlords. The Series LLC would allow the landlord to get the benefits of putting all of one’s rental properties in separate LLCs, while eliminating some of the cost of doing so. A Missouri Series LLC consists of an LLC with any number of series. This means a landlord could create one series, “My Rental Properties LLC” and then create 20 series of it, “My Rental Properties LLC, Series A”, “My rental Properties LLC, Series B,” and so on. Each Series is separate and distinct from the other Series. In order to get full asset protection and limited liability, each Series must maintain its own separate books and records. We’ll post more on Series LLCs in Missouri if/when they become more popular.

Third, owners of rental properties need to be strategic in how you title the rental units, as well as the ownership of the LLC. This is one area where we can use the asset protection provided by “Tenants by the Entirety” for married couples to provide additional protection for our clients.

If you own Rental Properties, we are happy to assist you in minimizing your liability, protecting your personal assets, and ensuring a smooth transition to the next generation.