LLC vs umbrella liability insurance

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Thanks for taking the time. I live in CA and buy a single house family home in FL for rental purpose. This is my only rental property without other business. It is in my name alone. For protection, I’m considering LLC or umbrella liability insurance. Will LLC protect me by limiting the liability to the rental property? What kind of LLC should I get? Is umbrella liability insurance a better choice? Please help

Asked on June 3, 2016 under Real Estate Law, California


SJZ, Member, New York Bar / FreeAdvice Contributing Attorney

Answered 4 years ago | Contributor

The answer is "yes"--you do both. A LLC will protect your personal assets from the majority of liability related to the business's or property's debts, such as if through not fault of you *personally* someone is injured, or if the LLC owes money to a contractor, an accountant, for utilities, etc. But it does not protect against amounts you might owe if you  personally do something wrong (e.g. if you accidently knock a tenant's teeth out with a 2 x 4 while doing renovations); or from any debts you personally guaranty; or from certain tax debts; or if someone looking to sue you if they can "pierce the corporate veil" and show that due to the way you comingled LLC and personal funds and otherwise failed to "respect" the independent existence of the LLC, that the LLC structure should be disregarded as being just a pretense. Having an umbrella policy will help protect not just you personally from any debts which might be able to bypass the LLC, but will protect the LLC and the property it owns, which are valuable assets of yours.
In terms of LLCs: in my experience, for a sole member (owner) of a small business, the best form is an LLC which elects "partnership" (not corporate) tax status; it will be "pass through" entity, which means that profits and losses are not separately (and additionally) taxed at the LLC level, but rather "pass through" to you and are only taxed once.

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