After talking to an attorney about LLC's and etc, it was mentioned that some clients of theirs will use two LLC's for their rental properties.
One LLC would be the "holding company" with all of the properties in the LLC's name, and the Holding Company would then LEASE the properties to the "property management company", which would then lease the property out to tenants.
So that if there was ever an issue, the "property management company" would be responsible and face liability, and not the holding company, but since the property management company doesn't have any actual "assets", there is nothing to pursue in a lawsuit?
In theory, this is certainly a viable option, but keep in mind that a good enough opposing counsel could argue the intent of the structure to circumvent liability. Secondly, the one LLC "holding company LLC" having lots of assets would still be at risk. I'm not saying you should have one entity per property, but I am saying the equity exposure (no matter how many or few properties) is the issue.
This is a tough call as your attempt to avoid risk is valid, even at the expense of another entity, but do keep n mind it is not bucket proof. How you run and manage each entity will also come into play.
Agree with @Will Barnard . Furthermore, there is nothing stopping a lawsuit against the asset company in addition to the property management company. Lawyer use scorch the earth strategies, in other words, sue everyone associated with the property.
Best advice I received was to choose insurance over LLC structures for liability. About the same amount that the lawyer will charge you for setting up several companies can be used to buy an umbrella insurance policy.
Thank you both for your replies!
How many BP members have ever been sued and lost with damagings exceeding what the property insurance policy would pay out?
Scott, get another attorney! An under capitalized management can be pierced and zap straight through to the holding company and, if you screwed up in management of the holding company....well, then straight to you personally.
Sounds like the attorney wants to dig up some more business setting up another LLC to me.
Use insurance, not a string of LLCs. You can hold 500+ properties in one LLC!
Your first line of defense to any claim is good management, not business entities. :)
@Scott Bartlett My strategy is to keep good insurance, be fair, ethical and address quickly potential problems.
@Scott Bartlett Its hard to imagine such a claim exceeding the insurance cap if you keep 1M on the properties and then add another 1M or so with umbrella policy on top of those.
$1M isn't much, depends on the property, remember the balcony that a tenant allowed like 15 people on and it fell off the building? Have an agent assess your risk, if your house holds 6 lives living in there, $1M won't go far, neither will the umbrella and make sure you are with the same company if you have more than one policy. Not turning this into an insurance risk assessment, but $5M might cost you $50-100 more a year, liability gets cheaper the higher you go per dollar of coverage. $10M you should sleep pretty well! :)
I agree fully with Bills info, it is great advices insurance s your first line of defense, then proper management, then the entity.
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