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My friend and I (both living in California) want to buy a couple of rental properties (one in Texas and other in Florida). Looking through the various websites and forums on the internet, we could either form an LLC or protect the properties and other personal assets with a good insurance.

What factors should we consider before we decide on one vs the other? Why would anyone go for an LLC if a good insurance provides all the protection that is needed? If we go the LLC route, What factors should we consider to choose the state we are going to file with?

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    what insurance are you skipping by picking the LLC: fire, flood, liability? Will there be a mortgage on the properties? – mhoran_psprep May 26 '15 at 10:55
  • @mhoran_psprep We were not thinking of skipping any insurance but to just reduce the liability insurance. We do not know how much these insurances cost right now but just trying to get information on how much the operating costs on these rental properties would be and if there is anything that would be redundant and could be reduced. Yes, we are planning on getting a mortgage to buy the properties. – Undivided May 26 '15 at 21:23
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LLC provides separation of assets, not insurance. This is useful if you have a lot of personal wealth, and don't want to put it at risk if you get sued for the liability arising from your rental property. So by using LLC, you can save on lower liability insurance coverage.

In California, LLC costs $800 a year (regardless of where the actual properties are, since you are yourself in California - you'll have to pay the CA LLC fee). So if you're saving $800/year on liability insurance premium - LLC pays off. Otherwise, it is useful for the peace of mind, and in some way concealing your identity as the property owner (in California, you still report LLC members to the SOS, but it is not open on the Google search for everyone, one needs to pay a $25 IIRC fee to get that info, as opposed to some other places).

In additional, if you're buying with a partner, you'll need a partnership agreement and probably additional partnership-related bureaucracy (tax returns, etc). If you're forming LLC - all that comes with it as well.

Bottom line, with LLC, liability creditors from your rentals will never get to your personal assets (unless you were mismanaging the LLC bad enough to allow creditors to pierce the veil). With insurance - there's always a risk that you'll be sued for more than your coverage or insurance won't cover you for whatever reason.


I'm not a lawyer. You'll need to talk to a lawyer specializing in LLC formation to get a better idea of the liability protection it provides.

  • Thanks for the quick response! We are going to talk to an LLC lawyer before we get one but from your response it makes sense to file for an LLC in California. Since this would be our first time buying a rental property, are there any other things that you think we should consider before we decide or any resources that could help with Do's and Don'ts. – Undivided May 26 '15 at 21:31

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