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Wednesday, August 3, 2011

LLP still the way to go?

Well, we did it again. With the strong Canadian dollar, and depressed housing prices, we bought another property in Phoenix. Another single family residential property that we will be renting out.

This provides an opportunity to revisit learnings from the past and see if some should be updated, so you will see a few new posts as a result.

Let's start with the decision to use an LLP. The previous reasoning for holding the property in an LLP was that (a) an LLP provides extra liability protection in the same way that an LLC does; and (b) an LLP should not be as prone to double taxation as we feared an LLC would be. (b) is because an LLC is taxed as an individual in the US, but Canada does not have an LLC construct so would probably see it as a corporation...and the tax agreement between the two countries does not allow personal tax paid in one country to be credited back against corporate tax due in the other. So, an LLP should be better from that perspective than an LLC, with the only drawback being that an LLP requires at least two "partners" while an LLC can have one "owner".

So...to today. That reasoning still holds. Therefore, if I want/need the additional liability protection, then an LLP seems to be the way to go. The question is...do I want/need the additional liability bad enough to put up with the extra administration work?

When we decided to go with LLPs previously the maximum liability insurance available from the insurance company we were referred to was $500K. Even by Canadian standards that is too low. Strangely, even with the reputation the US has as a very litigious country, $500K seemed to be the standard. Not good enough, so LLP. But later, we found that State Farm would offer $2M, so we switched. OK, is $2M enough? Probably for most circumstances. The LLP still offers the additional protection of isolating your other assets from any liabilities relating to this property. It becomes a game of probabilities. What's the probability of incurring a liability from a lawsuit over $500K? Whatever the answer is, the probability is significantly smaller if the number is $2M.

Conclusion: We're already down the path of using LLPs for the other two properties and we have to maintain the additional administration for those anyway. One more is a minor addition. So we will continue with the LLP approach for the third. If it were our first property, it would be a more interesting debate. Not sure which way we would go. For sure, the alternative would be holding the property in our own names, not an LLC.

2 comments:

  1. Hi,

    I'm not sure that a LLP gives as much liability protection that a LLC does but this differs by state. There seems to be a lot of mixed information out there. Some sources have said that the liability protection is such that one partner is not liable for the other partners actions/debts but they are still liable for their own personally. I'm not sure about the details in Arizona.

    Have you considered using an LLC and then filing a "Form 8832 - Entity Classification Election" to have the LLC classified as a partnership for taxation purposes? I have been told that this would then mean that the CRA would also treat it as a partnership like an LLP. The advantage is the better liability protection. I haven't tested this yet but I'm wondering if anyone else has. After reading through form 8832 is looks like you still need 2 members/partners to make this work.

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