I currently am investing in single family rentals. I hold all of my properties in one LLC. The other day a woman threatened to sue me for discrimination ( I denied her because she had ZERO source of income at the time). I run my business legally and ethically but that incident got me thinking. Can I/should I dilute my liability and protect my properties by forming separate entity to manage my own properties?
Thank you in advance for any responses!
Hi Jered, I just met with an attorney this evening because I had this same question and she suggested exactly what you have laid out in your post. I live in Wisconsin so keep that in mind as laws may change from state to state. However, she suggests to all of her clients that they should form a "property management" LLC plus an additional LLC for the actual property or properties to fall under. For example, if you get sued for possible discrimination, they can come after your property management company and you will not risk losing any of your properties. In addition, she went so far to say that each property you own should have it's own LLC. This might be overkill and is all based on your risk preferences. However, if something happens at the house that causes a tenant to sue you, you will only risk what is held in the LLC that is separate from your property management LLC.
I am new to all of this and still learning a ton each and every day but I wanted to share this insight with you in hopes that it may help.
This "strategy" sounds like a waste of money. I had a similar case like this but not involving real estate. I sued the franchisee of a Napa and a tire lube place. They both had this strategy in place, where one company managed the other. I sued everybody, both operating companies, all directors and officers of the companies. They lost. Their insurance company paid the judgement. When their is a legit claim you can have 200 llc's in between and you will still lose.
Thank you for the response. I am still up in the air on the management company. I would say that if you're renting single family houses an LLC for each property is defiantly over kill and will cause a big headache when it comes to book keeping and tax time. They hit on that in this forum if you are trying to decide on your strategy it may help.
I appreciate your input on the topic. I of course will bring this topic to my attorney. Regardless I always enjoy hearing any and all input.
so if you do set up separate llc's, what will you do about insurance? is there some kind of policy for the property management company that u set up to help cover you in a lawsuit, or do you just file bankruptcy on the property management company
I don't think I would get insurance on the property management company. It would not have any assets to protect apart from the entity itself.
Creating one (at least) LLC for your property is pretty common practice. In theory, you are creating a "bubble" of liability. What @Shawn Dandridge
is pointing out, if your separate "bubbles" are too closely aligned, someone can come after both very easily. If you are the sole proprietor of both a property management LLC that only manages property for an LLC that you are also the sole proprietor for, chances are they can get at both. What is different here, is they cannot get at your personal finances, primary residence, Jet Ski, Snowmobile etc... I am certainly no attorney, this is my interpretation.
**Best practice tip** Require every tenant to carry renter insurance with a minimum of $300,000 liability (in the Milwaukee area any tenant can obtain this for $10-$15 per month). When they start the place on fire, their dog bites someone, slips on ice or in my case, falls off a deck... the renter policy will help mitigate and in some cases prevent you from inquiring a loss record on your policy. (slightly different topic, but nevertheless I thought it applied here)
I have discussed this very thing with 2 attorneys last month. I am in Oklahoma by the way. Basically, both advised it is very easy to pierce the veil and go after everything. Also, they both said if they decide to file suit, they go after everyone they can possibly find and let the court process work out who might be responsible and who can get the claim against them dismissed. They don't look at mortgages to see how much equity there might be, who might really be liable. If they know they have a chance to prove damages and they will attempt to collect something from someone on a contingency basis. If the damages happen upon someone with assets to pay an attorney, then it is up to them to decide how much they want to pay the attorney to pursue recourse. However, scenarios we will face are more likely to be tenants like i deal with that are pretty much paycheck to paycheck and dependent upon a contingency fee lawyer who will soon find out if there is anything worth pursuing before exiting the case.
Regarding an LLC per property or an LLC at all, the advice was again the same. An LLC has to look like, operate like and effectively be a business. If it is not properly capitalized and plaintiff's counsel successfully argues that it is just a shell for liability purposes, it will get tossed out. Both attorney's have successfully done that and stated it isn't hard. Shell corporations are easy to spot. When I asked what "properly capitalized" was, he recommended for the property management part, $5,000 cash on hand minimum, (I currently have 3 properties) plus show that it receives payment for its services at market rates, separate books, accounts etc, plus insurance. He said there is no need for llc for the properties and that leaving them in my name is fine. He said that my insurance amounts, $500,000/property + $1,000,000 umbrella was sufficient. Not only does that cover you, that gets you the insurance company's attorneys should you get sued. They won't just bend over and cut a check. Unless you aim to be a slum lord and not maintain properties, provide safe habitat etc, there is really very little for a property owner to worry about. Not sure about your state, but in Oklahoma, the Landlord Tenant Act is VERY clear as to who is responsible for what and the rules for single family (defined here as quadplex or less) are very generous and realistic for landlords. If you do what you are supposed to do, you are pretty much fine and very rarely face a likely judgement against you.
Now, back to the separate LLC for the property management business. While both attorneys agreed that could be of benefit, I got the following disclaimers. First, it won't prevent me from getting sued as the property owner and operator of the single member llc, as mentioned above, but this gives them something to fight. Second, since I actually do certain repairs myself, including electric and plumbing (minor repairs that I am well qualified but obviously not licensed to do), even with an LLC, I and anyone else will ALWAYS be personally liable for anything they do ourselves. In a perfect world, a licensed tradesman would always make all repairs and his insurance and license would protect me. In a practical world, I am not paying $90/hour to install light fixtures, replace light switches, fix leaking faucets etc. Convert from screw in fuses to breakers, run new plumbing lines, auger clogged drains and other big jobs....that's what I hire out. The little stuff, done right basically has no liability so I am free to keep doing it. But I am liable for it.
Having got this advice, I am still going to form LLC for property management side to 1) put on appearance of business and 2) I think I am going to work towards Realtor license in order to get broker license in order to manage rentals for others and accelerate the replacement of my corporate income and allow going into real estate full time. Regarding reason number 1, if most people think they are dealing with a professional property manager, pay their rent to a company and not me personally and don't know that the person they see and talk to also happens to be the person that owns these properties, than I have already created an illusion to them that they are just dealing with the management company and most will never really wonder who actually owns the house they rent. Questions about the property will simply be answered in 3rd person and as part of me estate planning process, I will gradually start putting the properties in a revocable trust with my wife and I as beneficiary so that it is a little less public who owns them.
At the end of the day, I own nice properties....(nice for the blue collar, lower income area they are in). I maintain and rehab them properly and as a husband and father am motivated to keep them safe. The last thing I want is for anyone, especially little kids to get hurt. Intentions and actions like this are the best way to protect yourself from liability because you are actively eliminating liability. The people that run their business properly and ARE accountable are the ones that truly don't have to worry about being held accountable. All you are left with are the occasional but inevitable accidents and that's what insurance is for.
Multiple layers of LLC do nothing but keep attorney's and accountants in business. The key thing to remember if you want to use an LLC for asset protection is that it has to be properly maintained. I would guess that most people have a hard enough time properly maintaining 1 LLC let alone multiple layers of them.
I think having an LLC and good insurance are important for protecting your personal assets, but beyond that I think you're just wasting money.
My $0.02, not legal advice.
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