The Benefits of Holding Rental Properties in an LLC

The Benefits of Holding Rental Properties in an LLC

Are you in the short-term rental market? Do you own properties that you rent out for a few days or a week or two at a time? Airbnb and other popular rental websites have made it easier than ever for property owners to make extra cash renting their properties out on a short-term basis. But one thing most people don’t think enough about when they are looking to turn a profit on the short-term rental market is the potential for major liability exposure if something goes wrong.

“How bad can it be?”, you might ask. Well, how about paying out $11.6 million in damages after your tenant gets drunk and dives into a body of water you don’t even own?

This is exactly what just happened to Roy and Cindy Cheatwood, Louisiana residents who were renting out a condo they owned in Gulf Shores, Alabama on a short-term basis. The condo is located on West Lagoon Avenue, just a short walk from Little Lagoon.

In 2016, the Cheatwoods rented their condo to tourist Samuel Steib and a group of his friends. After drinking whiskey and beer for approximately 8 hours, Steib dove into Little Lagoon head-first, causing a spinal fracture and resulting in Steib becoming a quadriplegic.

Steib successfully argued that the Cheatwoods were indeed responsible for his drunkenness, because they apparently knew that Little Lagoon was shallow and not safe to dive into, but they failed to adequately warn their short-term tenants of this fact.

Protecting your Assets by Holding Rental Properties in an LLC

The Cheatwoods have just learned a very expensive lesson. It is not known what type of ownership structure they had with regards to their condo in Gulf Shores, but if they are like most people who are in the short-term rental market (or even the majority of those who own rental properties with long-term leases), the condo was probably owned by them personally.

This means the Cheatwoods are now on the hook for $11.6 million – minus the limits of their liability insurance, which is typically no more than $500,000, plus maybe an extra million or two if they had an umbrella insurance policy. This could very well mean financial insolvency – unless they had the foresight to set up a limited liability company (LLC) in which to hold their property.

An LLC is an inexpensive vehicle that can limit your personal liability exposure if you own rental properties. If your rental property is owned by an LLC, then only the assets within that LLC are at risk if someone files a lawsuit for something that goes wrong on your property.

So, if the Cheatwoods had their condo and no other assets in an LLC, then Mr. Steib’s damages would be limited to the net value of the condo (total market value minus any loans on the property). Which means in this case, having an LLC would have likely saved the Cheatwoods somewhere in the neighborhood of $11 million.

Advantages of Creating LLCs for Rental Properties

As you can see, the “limited liability” aspect of an LLC is hugely beneficial to a rental property owner. You never know what kind of trouble your tenants or their guests will get into, and it is just plain smart to have this kind of protection in place.

You may think that the Little Lagoon lawsuit is an extreme example and that something like this will never happen to you, but in today’s litigious society, how farfetched is it really?

Here is a question – does your rental property have a balcony? Most condos do, and a lot of them are on the second or third floor or higher. If this is the case, what happens if your tenants are drinking on the balcony and someone falls off? Do you think they won’t find a way to blame you for that?

There are countless other scenarios like this which can cause major liability exposure. But if you have your rental property inside of an LLC, you gain the peace of mind that comes from knowing that there is a very hard limit to what someone can sue you for.

In addition to limited liability exposure, LLCs offer several other advantages to rental property owners:

  • Pass-through Taxation: An LLC has tax advantages over other types of entities that you might set up to limit the liability exposure with your rental property. For example, corporations are taxed directly on their profits, then the owners are taxed again when they receive income from the business. With LLCs, the company’s income passes through directly to the individual income tax return of the owner(s), meaning your tax liability exposure is also a limited.
  • Great for Multiple Owners: LLCs are a great option for rental properties that have more than one owner, or “member”. An operating agreement can be created that spells out the rights and responsibilities of each member, making the property easy to manage and limiting the liability exposure of each member.
  • Relatively Easy and Affordable to Setup: Compared to trusts and other business entities, limited liability companies are easier and less expensive to set up and maintain. There are some areas that require the assistance of an experienced attorney, particularly when it comes to transferring the title of the property to the LLC, creating an operating agreement for the company, and some other complicated issues. But all in all, LLCs are a very affordable option that can be looked at as “cheap liability insurance” for your rental property.
  • Can Set Up Separate LLCs for each Property you Own: If you own more than one rental property, it makes good sense to set up a separate LLC for each property. This way, only the one property is at risk in each separate LLC. And because limited liability companies are fairly easy to set up, it is not too much trouble to protect each of your rental properties with a separate LLC.

Speak with a Seasoned Alabama Business Attorney

As we have seen from the recent verdict in the Little Lagoon lawsuit, no rental property owner is safe from the potentially devastating financial impact of a frivolous lawsuit – if the property is in the individual owner’s name. By setting up a limited liability company, you can protect yourself from this danger while continuing to reap the benefits of earning passive income on your rentals. To ensure that your LLC is set up correctly, be sure to work with a knowledgeable Alabama business lawyer.

At Davis & Fields, we have two decades of experience helping clients in Alabama create LLCs and handle all other business legal matters. We work closely with our clients, putting our extensive experience to work to develop the most practical, effective, and cost-efficient legal solutions.

For a personalized consultation with one of our attorneys, call us today at 251-621-1555. You may also message us through our online contact form or stop by our Daphne, AL office in person at your convenience.

Estate Planning Attorney - Davis & Fields

National Business Institute – Estate Planning from A to Z

Margie Y. Williams, Attorney in Daphne, AL

Our own Margie Williams was a featured speaker at the National Business Institute seminar “Estate Planning from A to Z”. The seminar was held on December 13 and 14 at the Hampton Inn & Suites in Mobile. Margie offered her insight on estate planning topics and provided a detailed overview of estate planning procedure and strategy.

Margie’s topics included:

TRUSTS 101

A.        Types, Goals and Functions of Trusts

B.        Major Laws Governing Trust Creation and Administration

C.        Who are the Main Parties? Their Duties and Responsibilities to a Trust

D.        Revocable vs. Irrevocable

E.         Choosing Trust Situs

F.         Trust Funding Basics

ETHICAL CONSIDERATIONS

A.        Defining Who Your Client is from the Start

B.        Handling Clients with Diminishing Mental Capacity

C.        Lawyers Acting as Fiduciaries

D.        Estate Status Updates for Clients – Why it Pays Off and How to do it Efficiently

E.         Practicing before the IRS

F.         Getting Paid: Billable/Non-Billable Hour and Retainer Agreements

G.        Preventing Unauthorized Practice of Law by Legal Staff

Margie is a member of the Estate Planning Council of Mobile, the Alabama Bar Association, the Baldwin County Bar Association and the Mobile Bar Association.

Davis & Fields represents clients

Money moving in land acquisitions for road, bridge project

Below is an article found on Lagniappe Mobile – Richard Davis and Davis & Fields is representing is representing two clients in the condemnation process for the $87 million project:

The Alabama Department of Transportation is following up on condemnations with cash for property owners as the state continues to acquire land for a controversial road and bridge project in south Baldwin County.

“The money was held up for a period of time for reasons I don’t know,” attorney Warren Herlong said. “But now the money is flowing. And there are substantial monies flowing.”

According to documents filed with the Baldwin County Probate Court, the state offered nearly $12 million for 10 of 21 tracts the state says it needs to build the project. Plans call for a flyover bridge off of the Foley Beach Express just south of County Road 8 to start a roadway through the condemned properties, culminating with a bridge over the Intracoastal Waterway just east of the Gulf Shores airport.

This project has stirred up controversy at both ends, with residents saying they were not informed about several aspects of the project. And state officials have admitted they have not done thorough studies to warrant a third bridge to the island. On the north side Craft Farms residents are worrying about noise from a 29-foot bridge a half-mile from their neighborhood.

Herlong is representing six clients in the condemnation process for the $87 million project.

“Your review of the court of records will show you the kinds of offers that have been made,” Herlong said. “In my cases there’s some $6 million in offers. Those monies have been released and paid intothe court.”

The largest offering among his clients is for tract 13 for $3.8 million and involves owners Laura Almaroad, Wanda Dickman and Joy Sprunger. Others include Doyce and Shirley Ellenberg, who were offered $1.2 million for 21.25 acres; the Williams Joseph Evans Revocable Trust, which was offered $737,150 for 3.09 acres; Orlanda B. Clark-Perrault and Robert T. Perrault, who were offered $450,000 for 3.06 acres; the George Wallace family, which was offered $374,300 for 20.38 acres; and Anthony and Patricia Diliberto, who were offered $405,000 for 8.38 acres.

“These are significant takings with significant offers,” Herlong said. “Right off the top of my head I can think of $10 million in offers.”

Among the biggest of the remaining cases is an offer for to the owners of Pandion Ridge, who own land on the south side of the Intracoastal Waterway. ALDOT initially offered them $3.7 million for 49.75 acres. On the north side of the waterway where the bridge footing is planned the state offered Coastal Resort Properties of North Carolina $943,150 for 29 acres. Attorney Richard Davis of Daphne is representing those two property owners. Both cases are being heard in the Baldwin County Circuit Court.

Others include Darrell Tidwell of Gulf Shores, who was offered $175,900 for 6.69 acres; Marvin Ray and Kathleen Peed, who were offered $70,000 for four acres; and the Baldwin County Bridge Co. was offered $9,750 for .13 acres.

Posted by | Jul 18, 2018 |

Moving Day South Alabama 2018

About Moving Day South Alabama

About Moving Day South Alabama

Moving Day South Alabama is our first annual fundraising walk event. It is a fun and inspiring fundraising event that unites families, friends and communities both large and small in the fight against Parkinson’s disease. This celebration of movement will feature a family friendly walk course, a kids area, a caregivers relaxation tent and a special Movement Pavilion featuring yoga, dance, Tai Chi, Pilates, etc. all proven to help manage the symptoms of PD.

It is ‘A day to move, a day to move others, a day that moves YOU!’

Event Details

Location:

Spring Hill College – Mobile | MAP

Registration Opens:

8:30 a.m.

Walk Start time:

10:30 a.m.

Contact:

Megan Willard
ph: 813-940-7246
mwillard@parkinson.org
7th Annual Mobile Bar Association of Women Lawyers - Networking Event for Professional Women

The Mobile Bar Association of Women Lawyers – 7th Annual Networking Event for Professional Women

The Mobile Bar Association of Women presents the 7th annual Networking event for Professional Women.

Featured Speaker: Our own Christine Clolinger will discuss the importance of women networking events

When: Thursday, October 26, 2017, 5:30pm – 7:30pm
Where: RSA Battle House Tower, 29th Floor, Regions Bank Pharr Room, 11 North Water Street, Mobile, AL
Admission is $20 and is payable at the door – Cash or check only

Join professional women from Mobile and Baldwin County for a night of networking.
Enjoy complimentary hors d’oeuvres and drinks by Georgia Roussos Catering.
Door prizes and more.

Special Needs Expo – Daphne

Special Needs Expo – Daphne (9/23/17)

Mobile Bay Parents Magazine and Eastern Shore Parents Magazine are hosting their inaugural Special Needs Expo from 10 a.m. to 1 p.m. on September 23, ad St. Paul’s Life Center in Daphne, AL. Admission is free and attendees will have the opportunity to visit with exhibitors and learn about products, support groups, recreational activities, healthcare, therapy and other services for children and adults with special needs.

View full article and event details

Baldwin County Bar Foundation Sporting Clay Tournament

Bar Foundation Clay Shoot Fundriaser 2017

What is a Clay Shoot?

It has been said that a clay shoot is “Golf with Shotguns.” If you’ve done this before, you know this. If you haven’t done this before, you’re in for a treat. Bushy Creek is located in a pleasant, wooded area of North Baldwin County. After you check in and all have received a safety briefing, you will pack your shotgun and shells into a golf cart with the three other members of your team and head out onto the course.

Under our format, each person will shoot 6 to 8 targets at each station. Bushy Creek has 14 stations, and each person will face a total of 100 targets during the round. The object is to break as many of those clay rascals as you can. Completing the course takes about 2 hours.

While the range is ‘hot’ we will have plenty of water and soft drinks to keep you hydrated.  Once all of the shooters have finished, your entry fee entitles you to have dinner and refreshments.

What would a tournament be without an awards ceremony?  After all of the scores have been tallied we will announce the winners in the various categories and distribute the prizes.

What is the Bar Foundation?

The Baldwin County Bar Foundation was founded in 2006 and is a 501(c)3 organization. Its purpose is to receive and administer funds for charitable, literary or educational activities as may be related to the legal profession, the judiciary and the public. Each year the Foundation gives grants to qualifying

applicants such as: The Drug Court Foundation, The Veteran’s Court, CARE House, The Lighthouse and others. The Bar Foundation gave five grants in 2016 totaling $11,000 dollars.

For more information click here

Under His Wings

Under His Wings – A Christian Home of Hope for Girls

As a proud supporter of Under His Wings, https://underhiswingsbaldwin.org/, a Christian based organization for at risk girls; we are very excited to say that they will be moving into their new home this October and wish to say thank you to all of the supporters of this incredible organization. Please take a moment to connect with them on Facebook, https://www.facebook.com/UHWPsalm91/ and congratulations, once again!