Does an LLC really help?

If you have a corporation for `insurance purposes', i.e. so that you can't be sued, forget it. The courts find it very easy to go after the major shareholder of a corporation where that shareholder is the only or chief employee and where the problem arose because of the actions of that employee/shareholder.

I found this in a tax adviser's blog. This is not a unique opinion. Every often I see people talking of LLC not being a real protection.
Now my question: Have any of you seasoned investors been in a situation when you needed such a protection and having an LLC (or another incorporation form) insulation really helped? If yes, could you share the story?

Edited: 06/26/2010 at 04:54AM

Matthew Gil

Real Estate Investor

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Mar 23 '08, 02:07 AM

The tax advisor is half right.

If all an investor does is whip a property into an LLC, then an attorney could pierce the corporate veil and go after the investors.

On the other hand, if the partners in the LLC have a strong operating agreement, keep minutes and don't mingle personal funds with the LLC's funds, then an attorney or court is going to be hard pressed to go after the partner's assets.

The moral of the story, run your real estate investment LLC as professional business.

Edited: 06/26/2010 at 04:54AM

Ryan Steele

Real Estate Investor · Chicago, Illinois

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Mar 23 '08, 11:45 AM

Matt was on the money with is comments. You can also add another layer or so if you are really worried.

You can own a property in a Limited Partnership with the LLC being the managing partner. Or make the LLC the Trustee of a TRUST.

Either way, you have to keep the detailed records as if the LLC was operating as a business. If you claim it on your own personal taxes as if the LLC is a passthrough like a S corp, then good luck to you! If you keep it separate, then you should be fine.

Just a note, I am not an attorney or tax professional, and you should seek the guidance of the pros.

Edited: 06/26/2010 at 04:54AM

Michael Rossi

Real Estate Investor · Ohio

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Mar 23 '08, 06:20 PM

The LLC just makes everything more difficult for the plaintiff. They will need to pierce the corporate veil if they are going to come after you personally. They may get a charging order if they win the lawsuit which entitles them to distributions (but distributions will never be made). The point is that having an entity makes everything harder and more expensive for the low-life scumbag contingency lawyer.

I was just sued about a month ago, and the LLC along with a VERY AGGRESSIVE defense caused the scumbag contingency lawyer to throw in the towel in less than a month. My legal fees were $530. It's a very long story that I don't have time to post right now. But, YES, having an entity is a valuable part of an asset protection program.

Good Luck,

Mike

Edited: 06/26/2010 at 04:55AM

Alex Potec

Real Estate Investor

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Mar 25 '08, 04:11 AM

Thanks guys for the valuable input. I think it's like car alarm: none is 100% proof, but still to have one is much better protection then none.
I'd like to add another angle to this question. Same folks, who said you did not need LLC, suggested having proper insurance instead. I checked Internet and noticed many banks offer Rental Property Insurance packages that typically include:
Dwelling coverage
Liability coverage
Building cost upgrade coverage
Did anyone have an experience with these products?

Edited: 06/26/2010 at 04:55AM

Michael Rossi

Real Estate Investor · Ohio

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Mar 25 '08, 04:21 AM

I wholeheartedly agree that you need insurance (including liability insurance) as part of a multi-layered asset protection program. The big problem with insurance is that it doesn't cover many of the things that tenants sue for; such as mold (that deadly black mold - oh no!), asbestos, lead paint, etc. That's one reason that you need a multi-layered asset protection program.

Good Luck,

Mike

Edited: 06/26/2010 at 04:55AM

Dave W

Real Estate Investor · Virginia Beach, Virginia

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Mar 26 '08, 05:53 AM

Can you protect yourself further by having an LLC for each property or group of properties?

Edited: 06/26/2010 at 04:56AM

Michael Rossi

Real Estate Investor · Ohio

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Mar 26 '08, 06:40 AM

Yes, you can further protect yourself by having a LLC for each property, but that can be quite cumbersome and expensive. For example, if you had 100 properties and 100 LLCs, that would mean 100 checkbooks, 100 tax returns, etc. You may not have time to do anything but paperwork!!!

Mike

Edited: 06/26/2010 at 04:56AM

Dave W

Real Estate Investor · Virginia Beach, Virginia

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Mar 26 '08, 06:55 AM

Indeed it would, I was thinking something like an LLC for groups of properties in an area

Edited: 06/26/2010 at 04:56AM

Mel Lobo

Banker · Pleasanton, California

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Apr 26 '08, 02:21 AM

So far, all I've heard here is, if you're buying a rental property, then an LLC helps.

Can we expand the discussion slightly to talk about single family houses also? Say I'm planning to buy 3 or 4 houses (one by one). Live in one and may be rent one. Others may be vacant. Does the LLC help this scenario also? How?

Edited: 06/26/2010 at 05:06AM

Bienes Raices

· Orlando, Florida

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Jun 14 '09, 07:49 AM

I'm sorry for bumping an old thread, but what do you mean by "keeping it separate" -- does that mean using a K-1? I thought the LLC was a pass through.

Originally posted by Ryan Steele

Either way, you have to keep the detailed records as if the LLC was operating as a business. If you claim it on your own personal taxes as if the LLC is a passthrough like a S corp, then good luck to you! If you keep it separate, then you should be fine.

Edited: 06/26/2010 at 08:35AM

Sarah Lawlor

· Los Angeles, California

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Jun 25 '09, 09:06 AM

Hi again Bienes,

You're correct that an LLC is a pass-through tax entity (taxes are reported and paid on owners' personal returns). I'm guessing that what Ryan Steele meant is that you should keep all the accounting books separate -- i.e., keep all financial records pertaining to the LLC separate from your personal financial records.

Best,

Sarah

Edited: 06/26/2010 at 08:44AM