If you own Arizona investment real estate, it is prudent to consider transferring the real property into a limited liability company. Owning real estate for investment purposes can be extremely risky.
If someone gets injured on the property, then that individual may sue the property owner for damages. If you own the property in your name, you may be personally liable. This means that all your assets – not just the rental property – may be at risk. Instead, an LLC allows you to protect your personal assets in the event of a lawsuit.
In order to transfer real estate into an LLC, you must sign a deed conveying the real estate to the LLC and record the deed in the county in which the real property is located. In most instances, if the property is held in the name of the LLC, the person filing a lawsuit against you cannot sue you individually.
Instead, the plaintiff must name the LLC as the defendant. Therefore, any judgment awarded to the plaintiff must be collected solely from the LLC’s assets. You may lose your entire investment in the property owned by the LLC, but the rest of your assets should be safe.
Another advantage of forming an LLC is that LLC’s are cheaper to form and cheaper to operate than corporations. In order to form and operate a corporation in Arizona, a substantial number of formalities are required.
However, there are fewer formalities required to form an LLC in Arizona and much fewer formalities required to operate an LLC. These formalities are an on-going requirement to ensure the liability protection the LLC affords. Fewer formalities translates into a greater likelihood that the LLC will minimize your liability from lawsuits.
If you fail to transfer your investment real estate into an LLC, then you are taking a major risk. While an LLC may not protect you from personal liability in all instances, it usually offers the best form of protection against creditors.
Keep in mind that simply transferring your property into an LLC is not sufficient to protect you from creditors. It is highly recommended that you speak to a knowledgeable real estate attorney who can assist you in setting up the LLC properly, instruct you in regards to on-going formalities, and also guide you in properly contracting with tenants.