It is important to consider an LLC for liability protection when owning a cabin. There are several key steps to take in order to establish an LLC effectively:
Property Management LLC
Create an LLC to manage the cabin, allowing for a clear definition of responsibilities through contracts with guests. This helps minimize liability and potential lawsuits arising from accidents or injuries on the property.
Ownership LLC
Establish a separate LLC to own the cabin, providing an additional layer of protection. In the event of a lawsuit, personal assets remain shielded while the value of the cabin may be at risk.
Legal Formalities
Setting up an LLC involves legal complexities such as obtaining tax identification numbers, opening bank accounts, and drafting contracts. Consulting with an attorney is essential to navigate these requirements and ensure compliance.
Transfer of Property
Transfer legal ownership of the cabin to the LLC using a quit claim deed. This formalizes the ownership structure and provides clarity in terms of liability and protection.
Insurance Coverage
Obtain comprehensive insurance specifically tailored for cabin ownership. Insurance serves as a primary means of protection and should be prioritized to cover accidents, injuries, and property damage.
Consulting with an attorney is strongly advised throughout the process to make informed decisions based on individual circumstances. By following these steps and seeking professional guidance, cabin owners can effectively protect themselves from potential liabilities and legal issues.
Video Transcript
Should You Put Your Cabin in an LLC?
Should you put a cabin in an LLC? I was recently asked this question by a business owner. So here’s the context. Imagine that you are a business owner and you own a cabin. You may have a lot of guests using that cabin. These guests might use it with you, but they might use the cabin without you present. Maybe those guests are using some of the stuff you have up there, like maybe the campfire. Maybe there’s some equipment. Maybe they’re swimming in a lake, and there are risks of drowning. Of course, that’s always present with a lake. There might be some sort of incline or steps that somebody could fall or trip down or roll down. There might be an oven that could have a gas leak. In other words, there are all sorts of potential dangers around there. What sort of protections can you implement to minimize your risks? One option is to have that cabin in an LLC.
Now, let’s differentiate a couple of pieces to this. First, the cabin can be owned by an LLC. Second, the cabin can be managed by an LLC. There are a couple of risks here because in general, when somebody is looking to sue the owner of a cabin, they’re suing them for some sort of negligence.
Examples and Liability
Let’s say, for example, one of the guests or maybe a friend or a guest of theirs gets hurt on the property and their allegation is negligence—that somehow there was negligence on the property. Now, by the way, you might say, “Stop, stop right there. My guests would never sue me.” But here’s the problem. Often they don’t have a choice. Say, for example, a child gets injured and has $15,000 worth of surgery due to the injury. When those medical bills are submitted to the health insurance company of the child, the health insurance company gets to decide whether to pursue a lawsuit against whoever was negligent at the cabin.
Now, it is possible for the person, or the child who’s injured, not to submit those medical bills to the health insurance company, but that’s extremely unusual. It’s very typical for people to say, “Hey, I have health insurance to cover injuries, so I’m going to submit that to the health insurance company.”
My point is, your guest may not be the one deciding whether to commence a lawsuit for negligence. It might be their insurance company. Alright, so let’s say there’s a lawsuit. The question then is who is liable for the negligence? Who is responsible for avoiding negligence on the property?
So say, for example, an ax which was used to chop wood was accidentally left out. Well, it’s probably whoever’s responsible for managing the property, it’s probably their liability. So what you can do is you can have an LLC responsible for managing the property, and that LLC can have a contract with those who are renting the property. This is fairly typical in like the Airbnb option or VRBO.
You are essentially renting from a company that’s managing the property, and that might be Airbnb or VRBO, and behind that might be another management company, and the owner of the property may have set up an LLC for that. All of that can provide some protection as long as there’s a contract between the guest and the LLC.
But, if you’re not planning to have guests sign a contract, then they’re not going to sue for breach of contract and they’re not going to sue for claims under the contract and you don’t have a contract governing that relationship, which means they’re suing probably whoever owns the property. In some states, you can sue the property owner even if there’s a contract with an LLC.
Benefits of an LLC
So where are we at so far? Just to summarize, having an LLC can provide some protection as long as there’s a contract between the management company LLC and the guests who get injured. Now, another option is to have an LLC own the cabin, but that LLC will still have liability up to the value of the cabin.
So with the management company, it may have virtually no assets in it, so that management company LLC might get sued and they might just go under. They might go insolvent. Even if they lose a lawsuit, they have no assets to pay, whereas if the cabin is owned by an LLC and that LLC is sued, then at least the value of the cabin can be lost in a lawsuit for negligence.
Complexities and Other Legal Considerations
As you can see, we’re getting a little complex here because for every LLC now you need a tax identification number, which is called an EIN. You need a bank account. You need contracts. And so we’re creating some legal formalities that are going to require some legal expense and some time and investment on your part.
So, if you want to set up an LLC, it can provide some additional protection. In fact, you could have two LLCs, one set up to own the cabin, the other set up to manage the cabin and the rental agreements with the guests. If you set up an LLC to own the cabin, you will need to transfer legally the property into the name of the LLC.
That’s done through a deed. The type of deed is usually a quit claim deed. That’s spelled Q-U-I-T C-L-A-I-M D-E-E-D. That is usually the type of deed that you would use to transfer your cabin into the LLC. One other consideration is getting insurance for the cabin. I actually think this is a great option for most people because it’s an easy first step that just costs money to get some protection for any sort of accidents that occur at the cabin.
All these LLC options add a lot of complexity. A lot of attorneys are willing to set up all these LLCs and formalities and contracts. It generates some legal income for the attorneys and it provides some protection for you, but I think the most protection is usually through an insurance policy that is designed to protect you in case of these sorts of accidents or injuries.
So my suggestion first is to get an insurance policy that covers guests at the cabin and then if you really want to protect yourself, or if you have a lot of assets exposing, like you have significant assets yourself or it’s a very expensive cabin and has a lot of equity, you may want to talk with your attorney about setting up an LLC to manage the cabin and setting up an LLC to own the cabin.
One other quick side note, if you have a mortgage on the cabin, there may be some complications with transferring the deed of the cabin into an LLC. Usually, you can do it because you are still the owner of that LLC, but there are some complications that go beyond the scope of this video here.
Summary
So hopefully that answers the question, “Should you put your cabin in an LLC?” The short answer is, “It can provide some protection from liability.” You’ll need to think about whether you have an LLC for managing the cabin, an LLC for owning the cabin, or both. And either way, I recommend making sure you have a good insurance policy for any guests who are using the cabin.
Conclusion
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