Insurance vs LLC

I get a question frequently, and that is “Isn’t insurance enough?”. Great question, and I would bet many of you reading this have had the same thought run through your head, too. Think of it in the car insurance world: if insurance was enough for protection, then we wouldn’t need seat belts and airbags. In reality, a Limited Liability Company (LLC) and insurance serve different purposes for protecting a rental property owner. An LLC can be “better” in certain ways depending on your goals. While insurance is always advised and a great idea, it oftentimes just isn’t enough for adequate protection. Just like it isn’t enough in a car crash either. Here’s a breakdown of why an LLC might be preferable to just having an insurance policy:

1 – Liability Protection Beyond Insurance
• Insurance policies have limits, and if a claim exceeds your policy limits (i.e. a lawsuit for $1M when your policy covers $500K), your personal assets could be at risk.
• LLCs separate liabilities completely. If a rental property is owned with the LLC, only the assets within the LLC are at risk in the case of a lawsuit, which in turn protects your personal assets.

2 – Protection Against Insurance Gaps
• Insurance may not cover all claims, such as intentional acts (i.e. negligence), certain environmental hazards, contact disputes with tenants and management companies, and claims denied due to policy exclusions (no way, an insurance company might look for ways to not pay out on claims, shocker).
• An LLC adds an extra layer of security against these uncovered risks. It will still protect you and your personal assets even if the insurance policy leaves you vulnerable.

3 – Creditor Protection and Lawsuits
• If you own a rental personally and get sued, creditors can go after everything you own.
• If the property is in an LLC, lawsuits are typically limited to the LLC’s assets, shielding things like your home, savings accounts, other investments, and other personal assets from the creditors.

4 – Estate Planning and Business Benefits
• LLCs make passing property to your heirs easier by avoiding probate. (One of my colleagues, Carlos, posted a great article on this a few weeks ago. If you haven’t read it already, it’s worth it.)
• You can also have partners or investors in an LLC more easily than co-owning property in your personal names.
• Tax benefits: LLCs can offer pass-through taxation, reducing most tax burdens for people.

The good news is that you don’t have to choose one or the other; you can have both. In fact, most of our savvy investors have both. They see the benefit that comes with good insurance polices and also see the limitations they have. That’s why they also have the LLC(s) in place to bridge the gap and provide adequate asset protection. In some instances, the insurance policy itself can be a huge liability and cause a lawsuit to go further than it should. That’s where the LLC steps up to protect your assets. As always, if you have any questions or need help with anything, we are here for you.

With NCH, the state’s top business formation service, you can register your LLC in Nevada quickly and easily. Our specialists will help you choose the right entity for your company and understand why an LLC in Nevada is your best option. We’ll assist you with all necessary Nevada LLC forms, including the vital Articles of Organization, and help you comply with state regulations. In addition, we offer expert assistance with tax compliance, credit building, and payroll management. Schedule a private consultation to explore effective solutions to minimize tax liabilities and protect your wealth. Start unleashing your LLC’s full potential today with NCH. Schedule a consultation with David Vanlandingham today!

DISCLAIMER: The above material has been prepared for informational purposes only, containing opinions of the provider, and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. Please consider consulting tax, legal, and accounting advisors before engaging in any transaction.