BiggerPockets

Hello;

Wondering if someone can shed some light on the personal liability protection when forming an LLC. I am comparing forming an LLC VS forming a Sole Proprietorship.

I believe that forming an LLC protects a person from the business debt of the LLC. A persons home or personal assets could not be touched to pay a debt of the business. My biggest worry would be liability protection - ie if you install say a hot water tank and it floods a persons house is there protection from someone going after your personal assets to collect damages?

If a person forms a Sole Proprietorship, they would of course take out a protecting liability insurance policy. This insurance would cover any type of work failures.

Is it necessary to take out a liability insurance policy if a person forms an LLC? If so than it seems that it would be much easier for a person to just form a Sole Proprietorship if their business is only providing services and would not be running a business that say makes expensive widgets and must keep a large debt owed to suppliers.

Wondering if anyone can shed some light on the Liability Issues of A LLC.

Regards

Sonny

Hoping not to have to use a lawyer. Rather use that money for insurance. I was hoping that someone would respond who has actually formed an LLC.

Regards

Sonny

sonny,

i'm not saying talk to a lawyer to set up an LLC. i'm saying, if you don't understand the legal and tax implications of starting and running an LLC (or any other company for that matter) it's best you talk to a lawyer.

go to your local library and take out a good book - Nolo has a mess of books on business entities and taxes.

setting up an LLC (a business entity) is easy, for the most part, depending on which state you form it in - some require legal notices which can be a little more complicated - i.e. new york.

what is the purpose of creating the LLC? for " asset protection" ? it's a big misconception that an LLC or Corp will provide " asset protection" automatically. additionally, depending on what you'll be investing in and what you'll be doing as a business model, tax advantages will vary between entities.

generally, the pass-through format of the LLC is very advantageous to real estate investing....generally.

yes another point is that many people approach the whole LLC phenom as if the LLC, by itself will miraculously solve all of their challenges and put to rest all fears. it actually does the exact opposite.

starting an LLC or any business for the first time, is exhilarating and also scary as hell. but once you do it and work at it - and believe me, if you want to do it right, you've got to work at developing a discipline toward minding your business.

once you do that - you'll find that it really isn't brain surgery. it's " common sense" to a point - the IRS will always throw you doozies - that's where the competent CPA comes in handy.

don't try and be an accountant - be a business owner. two totally different things.

if your business has no credit history, no income, etc. - in order to obtain financing - you'll have to personally guarantee any loans you might consider taking - this comes with a certain amount of risk obviously - because you're now personally responsible for the repayment of that debt.

additionally, liability issues are also civil and may pertain to the property you own, etc. if you own things in a company, that guarantees just about nothing as far as liability issues go - the company needs to be run correctly to begin with and also every precaution should be taken to do things straight up. you start bending the rules, leaving jobs all messy, don't put up fences or signs to protect a job site and little johny falls on some glass on your property, you could get sued.

then once you get sued, if your business isn't run like a seperate entity, the " corporate veil" is pierced and you entity won't provide for you any protections.

you should have a lawyer look over the legal details of your business. that's a smart start.

If you really want to be a DIY guy here then at least buy a good program. You can try Pat Tarr's " Armor and Camouflage" for $500 and you even get some forms that you can use (and reuse).

Remeber the LLC can be sued and if you are personally involved in any of the repairs or day to day dealing with the property you can personally be sued. A LLC is not like a big shield that protects you from everything you can still be sued, it does however protect your cash partners that do nothing at all with the property.