LLC vs. Personal Name

17 Replies

hi, I am about to buy my first investment property. I'll be getting a mortgage on my personal name, however i am considering to put the actual ownership of the property on an LLC, will that give me any protection in a case someone wants to sue me ?

Also, shouldn't insurance cover all possible claims ?

thank you all in advance for your input

You should speak to your lender about doing a deed transfer into an LLC for asset protection purposes... If you do a quitclaim deed, you will lose title insurance. They typically wont care if your paying your bills on time! LLC gives you some protection but if you want ultimate asset protection, look into land trusts. That way you own nothing but control everything!

LLC won't protect you, but a good insurance policy will.

Joe Gore

First of all I'm not a lawyer, however for investment property I'd suggest an LLC. Having all your investment real estate activity contained within a LLC or LLC's is great for a number of reasons. It contains most of the liability - so you lower your risk of personally being sued by someone. I personally think it also makes it better for accounting since even though the IRS considers it a pass through entity if it's a single member LLC - you contain everything inside "your business name LLC"

I would suggest getting a couple of investment properties first then create a LLC. Most people on bigger pockets, like myself, have an umbrella policy. Most landlord insurance policies cover accidents, but its usually between 100,000-250,000 coverage.

thank you all. what is a "quitclaim deed" ?

An LLC will give you some additional protection. It's not that difficult to set one up and although it's not absolute protection -- coupled with insurance it's not bad and way better than not having one. Just be sure to treat it as a separate entity (don't commingle funds). Just another point though, if you are financing the property through a bank, the transfer will allow the bank to call the loan due under the due on sale clause -- they probably won't but, do you want to take the risk -- just consider that.

If you plan to acquire the property thru conventional financing (I.e. mortgage) be careful with transferring the property to an LLC, Land trust or out of your name, since the mortgage could become due (i.e. you may have to pay your mortgage in full).

I recommend you read or listen (audible.com) to 3 books.

1. Loopholes of Real estate investing

2. Starting your Own Corporation and

3. Run your own Corporation

author: Garret Sutton. After this you will be almost a pro and you will be able to make an informed decision.

Originally posted by @Chris Simmons:
I have just met with 2 attorneys, one of which is a personal friend as I am looking into this very thing. I am in Tulsa, Oklahoma by the way. Both advised me to not mess with multiple llc and to simply leave the properties in my name. They said just form an llc to run the property management side and run the leases through that and then pay net proceeds to the owners, (myself). Both are accustomed to piercing the corporate veil and stated that without setting each up properly and then running them properly, you will get screwed by any competent attorney and it will be a lot of expense and hassle for nothing. They both referenced a matter that they said any tort lawyer would be familiar with, apparently it is a common law school topic. There was a cab operator in New York, yes, another state, but still applicable, that had a separate llc for each cab...insulating each. They were paper entities only as all the revenue was drained from each and paid to the owner. Eventually there was a wreck and one of the llc's was sued. Due to the fact that there were no assets, the cab was not run like a true business, it was not capitalized etc....just a shell entity for liability management, it was disregarded and all were opened up allowing access directly to the owner. An LLC can not be used for the sole purpose of shielding liability. In order to have a separate entity, it needs to be able to act as a separate entity. It needs capital reserves, it needs to have associated maintenance and expenses to run the entity etc. If you have each llc with sufficient capital, who knows exactly what that is, but for discussion, lets say $50,000 and insurance on top of that....ok, you are likely fine on the personal side...they just wipe out the llc....assuming of course they get judgement. Without that, you don't really have an entity and thus no liability protection. I am somewhat disheartened by this but must admit it makes sense. They basically said that if there is an issue and a lawsuit is filed, all parties will be named. After a period of time, as the legal process works itself out, each party can work to get released from the claim etc but no attorney will look at a property with a mortgage and just assume no equity thus no lawsuit. They will sue anyone and everyone and let the system prove who owns and owes what. and for those, like me, that assumed land trusts would amount to something, your first round of interrogatories will ask you to divulge (sworn testimony subject to perjury laws) all trusts that you benefit from and/or administer....there goes your big secret. Any landlords out there that have been through this legal nightmare called a lawsuit that can attest or refute anything i have said?

I am curious and still trying to figure out how i will get things structured on my end.

Thanks

Chris this is really interesting.  So basically if you held your homes and collected rent (PM) into this same account then it could be considered protection.  If I read it correctly?  I wonder why so many people have their properties and PM split into two different LLCs then.  Basically they are leaving their most valuable portion (the house) out to dry.


Originally posted by @Chris Simmons :
Originally posted by @Chris Simmons:
I have just met with 2 attorneys, one of which is a personal friend as I am looking into this very thing. I am in Tulsa, Oklahoma by the way. Both advised me to not mess with multiple llc and to simply leave the properties in my name. They said just form an llc to run the property management side and run the leases through that and then pay net proceeds to the owners, (myself). Both are accustomed to piercing the corporate veil and stated that without setting each up properly and then running them properly, you will get screwed by any competent attorney and it will be a lot of expense and hassle for nothing. They both referenced a matter that they said any tort lawyer would be familiar with, apparently it is a common law school topic. There was a cab operator in New York, yes, another state, but still applicable, that had a separate llc for each cab...insulating each. They were paper entities only as all the revenue was drained from each and paid to the owner. Eventually there was a wreck and one of the llc's was sued. Due to the fact that there were no assets, the cab was not run like a true business, it was not capitalized etc....just a shell entity for liability management, it was disregarded and all were opened up allowing access directly to the owner. An LLC can not be used for the sole purpose of shielding liability. In order to have a separate entity, it needs to be able to act as a separate entity. It needs capital reserves, it needs to have associated maintenance and expenses to run the entity etc. If you have each llc with sufficient capital, who knows exactly what that is, but for discussion, lets say $50,000 and insurance on top of that....ok, you are likely fine on the personal side...they just wipe out the llc....assuming of course they get judgement. Without that, you don't really have an entity and thus no liability protection. I am somewhat disheartened by this but must admit it makes sense. They basically said that if there is an issue and a lawsuit is filed, all parties will be named. After a period of time, as the legal process works itself out, each party can work to get released from the claim etc but no attorney will look at a property with a mortgage and just assume no equity thus no lawsuit. They will sue anyone and everyone and let the system prove who owns and owes what. and for those, like me, that assumed land trusts would amount to something, your first round of interrogatories will ask you to divulge (sworn testimony subject to perjury laws) all trusts that you benefit from and/or administer....there goes your big secret. Any landlords out there that have been through this legal nightmare called a lawsuit that can attest or refute anything i have said?

I am curious and still trying to figure out how i will get things structured on my end.

Thanks

listening to last weeks podcast w the attorney might help to clear a few things up.

1.  Agree w @Luis Montanez  - Garrett suttons books are incredibly informative in regards to entity formation, asset protection. Educate yourself!

2.  Sounds like a good insurance policy is helpful but not something to hang your hat on

3. A properly run LLC will likely be of help in protecting assets. Check individual states for details. I like Wyoming for single-member llc's

4.  As so many have said before me, it's worth the cost of atty and/or acct to make sure this is done correctly.  It will save you lots in the future! (And you can write it off)

Good luck!

Are you obtaining financing on the property? Some lenders will not allow you to put the property in your newly formed LLC. You may need to put the property in your personal name and then quit-claim it to your LLC after closing. I would check with your attorney on the real estate transaction and your lender.

The information you have is both right in its own way. First keep in mind in the podcast this was advice for folks with 8 to 10 million in assets. There is a reason for that. If you first rental property is several hundred thousand yes definitely form an LLC to start. In Wyoming the filing fee is $100 and a corporate book is about $80. I charge around $120 to file one. They are easy anyone can do it. What is important is you keep the corporate formalities. It must act like its own person. It has its own bank accounts, it has yearly meetings, it NEVER comingles money with others. Never buy yourself groceries or gas with it, never undercapitalize it, etc.

Another big thing that is never mentioned is that an LLC can never insulate you from a negligent act. If you have a property manager then why have a separate LLC to manage your properties? If you manage yourself and do a personal tort there is no protection because you can be held personally liable. let me give some examples. You have an LLC you drive company car and hit someone and injure them. You will be sued personally. If they win they go after your personal assets. If however you have a property manager and someone works on the furnace but messes up the vent pipe, and someone dies the corporation will be sued, as will the management company. As a shareholder you are not liable. If however you were the one who worked on the furnace and messed it up, you will be liable no matter how many LLCs you own. So small time owner operators only gain so much protection from LLCs. It is still a good idea to have an LLC, if someone slips on the sidewalk and sues they probably wont get past the LLC assets. Insurance is your best first line of defense. Then your LLC. On your first deal or 2 the cost of maintaining an LLC can greatly affect your profit margin. If your insurance is higher with an LLC, and you have to file your annual report, (in two states) you file a corporate income tax return, you have separate checking account costs, etc, and your profit margin is $100 per month you will not end up making much. If you have 5 properties making $100 a month each its time to have an LLC. Take the time to learn about corporate entities so you do not end up getting the corporate veil pierced. Hope this helped.

So if I'm reading this thread correctly, it seems most people are saying to rely on insurance for the first 1 - 5 houses, until there's an economies of scale which both make an LLC protection kick in, as well as offset the costs of running the LLC. Is that correct?

I was also curious about this. Ben I have the same take away that you do from this thread.

If I have personal assets such as a retirement 401k and I start real estate investing with an LLC and I put my first 5 properties under that LLC then if someone sue's the LLC all properties within it are at risk - but my personal assets are not, correct?

Well, technically, everything you own is still at risk, from what I've read here. Especially if the financials on the LLC are not really reflecting its use as a real company (just paper, but no or very little transactions). However they do provide protection.

I also spoke with an accountant and she said she recommends opening one LLC, then within that LLC opening what's known as "Series LLC's" and each house would go into each series. That way the homes are protected from one another while still under an umbrella corporation .Presumably for easier money management...not really sure. Forgot to ask that one.

I'll definitely seek advice from a lawyer just before I buy a property.

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