Investor · Willow Spring, NC · Member since 2013 · 788 posts · 285 votes
There is always much debate on if an LLC is needed. I have one. Only because someone told me to hold my properties in it for protection. I paid a lawyer to draft it and I signed it, and filed it away. I read most of it, but I honestly couldn't tell you if it was even worth the paper it was written on. If I was sued, I wonder if I would actually be protected.
I'd love to hear from people who had an LLC that actually protected them from being sued and found liable for something.
This is a great question, though I suspect responses will be limited only because it's probably not that common. I'll go ahead and throw out an example of a lawsuit my firm was involved in a couple of years ago, in which I would say the LLC worked as it was supposed to. (I had no personal involvement with the case.) It was a larger apartment complex with separate management. A little girl was run over and killed in the parking lot by an employee of the manager, and the entity that owned the apartment, the entity that managed the property, the manager, the driver/employee were sued. I think the theory was there should have been children playing/ speed limit signs and speed bumps. Long story short, there was a $1M verdict against the defendants, all of which was covered by insurance.
I would say the LLC worked because there was zero consideration given to suing the passive owners of the property who had nothing to do with the management or operation of the property. It would have been a waste of time, and I think that most plaintiff's lawyers would have reached the same conclusion. Also, there was insurance, so there wasn't that much incentive to go through the quixotic attempt to pierce the veil. (This was a professional operation and not some mom-and-pop single member LLC, so they had probably done everything right.)
I would also say that the case illustrates why smaller investors who manage their own properties or are otherwise actively involved should not over-rely on LLCs. Everyone who had any active role with regard to the property got sued, and I believe there was liability placed on everyone. I would also say that the case illustrates the importance of liability insurance. At the end of the day, everything was covered by insurance, and the LLC ended up being superfluous.
An LLC can be helpful in other ways, such as establishing a clear business structure when there are partners involved and avoiding probate upon the death of one of the partners. We learned this the hard way when my brother-in-law died suddenly prior to us having an LLC. Probate was cumbersome and costly. We now have two LLCs. One for the properties/business owned by just my husband and me, and the other one for the properties/business we own with other family members.
The LLC gives our personal assets additional protection. Keep in mind, the business must be run as a business according to the terms of the LLC to reduce the risk of the shield being pierced.
Highly recommend having a good umbrella policy in place too.
I agree with you but it only cost about $350 to pierce the veil. Carry Insurance is the best policy.
Joe Gore
I have no experience with that, but is this in reference to a certain fee?
My impression is the big deal would be go subpoena all your records and show you didn't keep the business in good standing. I'd guess this is mostly just time (Which attorney's price very high!) so the benefit to the elaborate entity setup is that they have to put a fair amount of time into figuring out who owns what and what is there and how to go about attacking it.
If you did something wrong it won't help in the end, if you had something bad happen unintentionally it probably won't matter much either. If you have an ambulance chaser they might decide it isn't worth putting a ton of time and effort into figuring it all out while working on contingency on something they know is pretty BS and hope to milk a settlement to get them to go away.
It really doesn't take that much time to figuring out who is behind an LLC or CORP.
Joe Gore
That is why people promote the multi level entity stuff.
Much harder to track down the "people" involved if title is held in a Trust where the beneficiary is an LP that has an LLC as the GP.
Not impossible by any stretch but it is more than checking title at the registry and then going to the Sec of State to see the names on the corporate docs.
I don't need to check the things you mention to get to the owner and yes some people try to cover their tracks by shuffling the paperwork but in the end, you find the owner, and yes it can take a little longer.
I don't need to check the things you mention to get to the owner and yes some people try to cover their tracks by shuffling the paperwork but in the end, you find the owner, and yes it can take a little longer.
It is really not an issue of either/or, as an umbrella (or liability coverage "in general") and an LLC are/could be created for different reasons. Think of the LLC and other work you may do with legal and financial advisers (such as attorneys and accountants) as your "castle walls and moat" around your assets, personal and otherwise. Think of the insurance you secure as an "archer in the watchtower". In other words, the walls and moat should be your foundation as it pertains to protecting you/your assets. The archer (insurance) won't pick off every bad guy that tries to get in, so having the walls and moat is vital. Think of them working together not in lieu of each other. Hopefully this helps!