Asset protection with LLC

If a real estate dealer starts an LLC to rehab properties, and will be dealing with all cash for the purchase of the properties and operating capital without any loans, what are the options available from an asset protection standpoint to protect that cash and properties owned by the LLC from liability against the LLC?

Edited: 06/26/2010 at 08:16AM

Jon Holdman

Real Estate Investor · Denver, Colorado

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Icon_minipost May 18 '09, 01:49 PM

What? If the LLC owns properties and has cash, a lawsuit from any of its properties can go after the other properties or cash the LLC owns. An LLC would protect you personally from claims against the LLC. If you have multiple properties, and you want to avoid a lawsuit against one property going after another, they need to be in separate entities.

Edited: 06/26/2010 at 08:16AM

Jon Holdman, Flying Phoenix LLC

Fred .

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Icon_minipost May 18 '09, 10:39 PM

I wonder how investors that rehab multiple properties with all cash, protect their cash from claims against the LLC. Since some of the holding time of these properties is sometimes short, multiple LLC seems out of control

Edited: 06/26/2010 at 08:16AM

Will Barnard

Rehabber · Santa Clarita, California

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Icon_minipost May 19 '09, 02:23 PM

Fred, it is called insurance.
When I rehab a property and have cash into it, I get a policy with at least $1M in liability protection. That protects me from any workers getting hurt (I demand they carry their own insurance and sign a release of liability, but still get the insurance anyways).
Any assets, property or cash, existing inside a LLC is at risk. You must have additional provisions and lines of defense. Insurance is your FIRST line of defense.

Edited: 06/26/2010 at 08:16AM

Will Barnard, Barnard Enterprises, Inc.
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Jesse R

Rehabber · El Paso, Texas

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Icon_minipost May 19 '09, 03:15 PM

I recently had a conversation with a close friend of mine who is a RE attorney. According to him, putting every investment into a different LLC is unnecessary and could even hurt your case.
His reasoning behind this was that a judge would see this and think to themself, "why does this person have 25 LLCs with only 1 or 2 properties in each one"? It is more than obvious to a judge what the investor is trying to do. Which is hide and protect assets from a lawsuit.
The judge would more than likely pierce the corporate veil to fulfill a settlement involving another one of your investments.

Edited: 06/26/2010 at 08:16AM by Jesse R

Fred .

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Icon_minipost May 19 '09, 10:57 PM

nationwidepi & Jesse, you both make great points, what I am trying to figure out is what nationwidepi mentioned as "You must have additional provisions and lines of defense." What are some options for those additional line of defense? Thanks for the previous reponses.

Edited: 06/26/2010 at 08:16AM

Will Barnard

Rehabber · Santa Clarita, California

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Icon_minipost May 20 '09, 05:04 AM

Lines of defense:
1) Insurance (never under-insure to save costs, it is not worth the savings)
2) LLC
3) Operating the LLC as a seperate entity and business without comingling persoanl funds.
4) Operating the LLC responsibly and not being a slumlord. Negligence is the easiest way to have your corporate veil pierced.
5) Use property managers - Having a PM handle the day to day operations seperates you from having these ongoing daily responsibilities and provides evidence that the owner/manager of the LLC is a non-active participant in the daily operations, rather just a passive investor. This helps seperate you personally from liability arising inside the LLC.
6) Land Trusts (Don't actually provide asset liability protection but do assist in several aspects)
7) Additional Insurance (Umbrella Policy)

Edited: 06/26/2010 at 08:17AM

Will Barnard, Barnard Enterprises, Inc.
E-Mail: info@barnardenterprises.com
Website: http://www.barnardenterprises.com
info@barnardenterprises.com

Eddie Ziv

Real Estate Investor · Studio City, California

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Icon_minipost May 29 '09, 04:02 AM

I talked to one lawyer who specializes in asset protection. He suggested to from an LLC in the state where the property or properties are located. That LLC should be owned primarily by another LLC.formed outside that state. This allows double protection. There is another form called Delaware Series LLC which some lawyers advocating. I am curious to know if any of you out there use any of these methods.

Edited: 06/26/2010 at 08:23AM

Will Barnard

Rehabber · Santa Clarita, California

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Icon_minipost May 29 '09, 07:41 AM

Series LLC's are nor recognized in all states and there are times to use them, and times not to. This topic is for you and your RE attorney, not us.

Edited: 06/26/2010 at 08:23AM

Will Barnard, Barnard Enterprises, Inc.
E-Mail: info@barnardenterprises.com
Website: http://www.barnardenterprises.com
info@barnardenterprises.com