Many investors know about the asset protection that they can obtain by setting up LLCs in which to hold their investment properties.  There are differing positions on whether each property should have its own LLC or whether an investor should have one LLC which holds all of the person’s properties.  I believe that the answer lies somewhere between those two positions, and is based upon the amount of risk the investor can handle after weighing a number of factors.  The purpose of this article is not to address that issue; the focus of this article is on making sure investors get the benefits of their LLCs once they are set up.

First, a common mistake investors make is transferring title of a property to the LLC but then failing to name the LLC as the landlord on any lease they enter into with a tenant.  For example, many investors put their own name on the top of the lease where the “landlord” is identified.  However, that is wrong.  The landlord is the owner of the property and the entity getting the benefit of having the lease.  Therefore, the LLC should be named as the owner and landlord.  On the other hand, the investor is an agent for the owner, getting tenants and managing the property.  Under Arizona law, an agent does not have any liability for acts taken on behalf of a disclosed principal.  Ferrarell v. Robinson, 11 Ariz.App. 473, 475, 465 P.2d 610, 612 (1970).  On a lease, the LLC should be listed as the owner.  If the investor wants to include himself on the lease, he should be identified solely as acting as an agent for the owner.  Otherwise, if the investor names himself personally as the landlord and fails to identify that there is a different owner of the property, the investor may personally be liable in the event of a lawsuit.  In other words, the investor lost all of the protections he sought by forming the LLC in the first place.

This same theory is important when you are managing properties for someone else.  If you are a property management company, your company should not be listed as the landlord on a lease – the owner is the landlord.  The property manager should be identified as the person to handle all issues, but noting that he is only acting as an agent for an owner.  If a lease is properly completed, and the tenant sues the property manager for a return of their security deposit, the property manager should summarily be dismissed from the complaint as he is only an agent and have no liability.

Second, if the investor personally does work on the property they can personally be liable for to the tenant for any work done negligently.  For example, even if the home is properly transferred into the LLC, and the LLC is named on the lease, the investor may be personally liable if he negligently repairs a water heater on the property and the tenant gets injured.  It’s important that the LLC hire independent contractors to undertake such repair work, so that the LLC is not liable.

An LLC can serve as a great means of asset protection.  Investors need to make sure that they properly use the LLC to gain that protection.