Does an LLC really help?

Question

First a quote:

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?

Matthew Gil · Answer

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.

Sarah Lawlor · Answer

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

Bienes Raices · Answer

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.

Mel Lobo · Answer

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?

Michael Rossi · Answer

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

Dave W · Answer

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

Dave W · Answer

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

Michael Rossi · Answer

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

Alex Potec · Answer

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?

Michael Rossi · Answer

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

Does an LLC really help?

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