Allow me to set the scene:  You’re driving along a picturesque New Hampshire road.  The sun is shining, and on your right is a beautiful, pristine lake.  Coming up, you spy a quaint cottage with a for sale sign sitting in the front yard.  The cottage is right on the water — perfect for that vacation or weekend getaway.  The timing couldn’t be better:  the kids graduated college, you’re financially secure, and you have some disposable income.  You figure: “Why not?  I could buy the property, use it when I want, rent it when I don’t, and the income will cover much of the taxes and other carrying costs.”  Fast-forward a few months, and you’re about to close on your vacation house, when your pragmatic side starts to chirp:  “What if someone gets injured on my property?  What can I do to protect myself?”

Many people think of the limited liability company (“LLC”) as a vehicle to establish a retail business, restaurant, or other types of “more traditional” business ventures and often overlook the LLCs use as a tool to protect certain assets – i.e. your primary residence – from the liabilities associated with other assets — i.e. your vacation home.  The LLC provides a liability shield to its owners, meaning that the owner of an LLC, also called a “member,” cannot be held liable for the debts and obligations of the LLC solely by virtue of being a member in the LLC.  When used correctly, this liability shield can be a valuable tool for asset protection.

The LLC’s liability shield is not impervious, and the would-be member of the LLC would be well-advised to remember the LLC’s limitations.  In the context of owning a vacation home, the LLC member should remember that an LLC will not protect her from her own negligence. For example, if a member of an LLC personally makes negligent repairs to a rental property and a renter is injured, that member would remain personally responsible.  That means both the vacation home, owned by the LLC, and the member’s personal assets can be attached and liened upon should a lawsuit ensue.

Additionally, the LLC’s liability shield can be disregarded if the LLC has been used to perpetrate a fraud.  The doctrine of “veil piercing” can be used by an aggrieved party to disregard the LLC’s separate legal existence, thereby allowing a creditor access to the personal assets of the LLC’s members to satisfy a judgment or debt.  “Veil piercing” is applied when the LLC’s form is not respected to the detriment of a creditor, which is commonly exhibited by the absence of separate books for the LLC, the LLC’s lack of assets to pay its debts and obligations, the failure to of the members to identify the LLC when doing business for the LLC, the failure of the LLC to hold meetings to discuss or conduct business, etc.  In other words, if the LLC’s separate existence is a sham, a court may disregard that separate existence and impute liabilities directly upon the LLC’s members.

So was it a waste for you to buy the home through an LLC?  The answer is no.  The LLC, if used correctly and respected, can be critical to protecting your assets.  If you want to avoid being personally liable for potentially negligent repairs, utilize a licensed and bonded contractor to do the job (which would distance your personally from an allegation of negligence).  If you want to avoid “veil piercing,” treat the LLC like it was a separate legal entity:  maintain a separate bank account for the LLC that has enough money to pay for the day-to-day expenses of the LLC, hold meetings to discuss and conduct business, and when transacting business for the LLC sign as a “member for” the LLC.  This is by no means intended to be an exhaustive list, but the above is meant to illustrate that if you respect the LLC’s separate legal existence, you can reap the reward of a valuable liability shield that can protect your residence, your bank account, and your personal assets.

Lastly, the LLC should not be viewed as a substitute for insurance.  While the LLC can protect personal assets, it won’t protect the vacation home from a judgment lien if a renter’s clumsy uncle takes a tumble down a flight of stairs.  Insurance can protect the vacation home from those sorts of liabilities, and the value of insurance cannot be overstated in the context of owning a vacation property.

In short, limited liability companies are valuable tools that should be considered whenever purchasing a vacation home that could be rented out to others.  Forming the LLC, however, is only the first-step, and vacation home owners should make sure to (1) respect the LLC’s form, (2) avoid engaging in personal repairs that could give rise to a claim of negligence, and (3) consider purchasing an adequate insurance policy.  If the right precautions are taken, owning that vacation home can be the dream that is fulfilled.