I'm getting ready to go to closing for my first rental property and I am terribly confused. 

Facts:

-I am purchasing a single family rental property with a conventional mortgage from my bank.

-I have created a Pennsylvania LLC in my wife's name with her as the only member.

-The loan and property will be 100% in my wife's name. (The reasoning for this is that she is a PA resident and I am not)

-My name is no where on the title, LLC documents, or mortgage.

-The bank will not allow us to put the property under the LLC because that would require a commercial loan.

-My wife and I were each involved in an auto accident in the last 3 years so we are unable to qualify for an umbrella insurance police.

Question:

How can I best protect myself from lawsuits? Is it true that an LLC provides no asset protection if you self-manage the property? If the LLC is in my wife's name and I manage the property does that count as self-managed?

Thank you!!

you might just get a good landlord insurance policy on the house and be fine

THIS NOT LEGAL ADVICE

But, I have found LLCs to be useful if setup and managed properly. The key is to keep all business and all personal separate. If you are self managing, yon need an Operating Agreement that you follow.

However, your situation is a little different. I am not surprised by the banks position. I would run this by a PA lawyer, but you could either lease the house to your LLC and have the LLC lease to the tenants or sign a management agreement with the LLC and document everything.

Banks don't like little houses in LLCs and either do insurers.  If you can find a bank that will loan on it, you are halfway there.  Then try and convince a residential insurer @Joel Burt .

I place my multi's over 5 units and other commercial property in LLCs, but not residential. Too many hassles for questionable protection.   Not legal advice.  Just what works for me.

it is true, in Maryland anyway, that those that are running the LLC can also be held liable for the LLCs behaviors. aka, if you are running your own LLC, you can get hit.....negates the power of what an LLC is, and what it can do. A feel a lawyer could make a strong argument that the caveat about liability for those running said LLC being liable for the actions of it is not legal. After all, then it would not be an LLC. I feel the state has no right to offer the an LLC and enjoy the annual 300 dollar personal property filing fees from them without affording the LLC the protections they are supposed to carry.

Originally posted by Account Closed:

it is true, in Maryland anyway, that those that are running the LLC can also be held liable for the LLCs behaviors. aka, if you are running your own LLC, you can get hit.....negates the power of what an LLC is, and what it can do. A feel a lawyer could make a strong argument that the caveat about liability for those running said LLC being liable for the actions of it is not legal. After all, then it would not be an LLC. I feel the state has no right to offer the an LLC and enjoy the annual 300 dollar personal property filing fees from them without affording the LLC the protections they are supposed to carry.

 No.  There is no legal argument to be made there.  The state can offer whatever legal protections it likes in return for whatever filing fee it likes.

Think about it from the other side. You're injured due to the provable neglegance of your landlord. Would you be OK with it if he could say, "Hey, I paid $300 and filed for an LLC, so I can be as negligent as I like! Sucks to be you!"

I don't think you would be OK with that.

I'm no lawyer, and this isn't professional advice of any sort, so assume I'm talking out of my rear end.

That said, it seems to me that an LLC is most helpful when you lose a lawsuit--it doesn't prevent getting sued. And if someone is going to file a lawsuit, they sue everybody--the LLC, your wife, the bank, you, your dog, etc.--hoping it will stick to someone with money. 

I know someone who, through her LLC, is a co-owner in a Delaware Statutory Trust (DST) property and she still got sued. Like my business law professor always said: "You can sue a ham sandwich."

But I understand wanting to have some sort of asset protection, so what if you and the Mrs. re-title everything that is in her name to you? That would essentially make her as judgement proof as the LLC would be. Maybe... again, not a lawyer. Or deed the property to the LLC after closing? Steve Combs' non-legal advice above is probably better than my non-legal advice... Good on you for jumping in!

You're not going to change the banks position on this matter if they won't lend to an Llc on a residential loan. Unless you go out and find another lender you'll need to settle for an alternative.

An Llc offers legal protection when they are set up and operated correctly. To address your concern for protection from lawsuits. The alternatives are a trust, not the greatest of protection, but certainly offers some advantage over being on title in your person. A family limited partnership, although similar to an limited partnership it can be designed to be more effective to protect assets and offer liability protection. Setting one up will require a knowledgable estate attorney, and it will come with a cost. 

Originally posted by @Richard C. :

Originally posted by @Seth Sherman:

it is true, in Maryland anyway, that those that are running the LLC can also be held liable for the LLCs behaviors. aka, if you are running your own LLC, you can get hit.....negates the power of what an LLC is, and what it can do. A feel a lawyer could make a strong argument that the caveat about liability for those running said LLC being liable for the actions of it is not legal. After all, then it would not be an LLC. I feel the state has no right to offer the an LLC and enjoy the annual 300 dollar personal property filing fees from them without affording the LLC the protections they are supposed to carry.

 No.  There is no legal argument to be made there.  The state can offer whatever legal protections it likes in return for whatever filing fee it likes.

Think about it from the other side. You're injured due to the provable neglegance of your landlord. Would you be OK with it if he could say, "Hey, I paid $300 and filed for an LLC, so I can be as negligent as I like! Sucks to be you!"

I don't think you would be OK with that.

Perhaps the state can, and does, but I disagree. An LLC is an entity that is supposed to offer limited liability not to exceed the company itself, yet actually does not. If some individual were negligent, the LLC should be suffering the consequences, not the owners the LLC that the LLC was created to protect. To bypass the LLC would be equivalent to bypassing the corporation to sue the individuals working for it as well. What the state is saying is that the LLC does not actually offer Limited liability to its owners, and as a result negates the structure for which it is intended.

Originally posted by @John S. :

I'm no lawyer, and this isn't professional advice of any sort, so assume I'm talking out of my rear end.

That said, it seems to me that an LLC is most helpful when you lose a lawsuit--it doesn't prevent getting sued. And if someone is going to file a lawsuit, they sue everybody--the LLC, your wife, the bank, you, your dog, etc.--hoping it will stick to someone with money. 

I agree with this. If you're just starting off and have very little assets, what're you protecting? I wouldn't sweat the LLC thing just yet. Get to the point where you have some assets to protect and then you can worry about LLC's and asset protection. Get a good insurance policy and you're set for a couple SFH residential properties. LLC's aren't magic and if you don't operate them properly (are you taking minutes at your corporate meetings?), provide zero protection.

You should listen top the podcast on asset protection.  I believe it was 106 or 107.  

As for having your wife as 100% owner of the entity?  It is probable that a court would determine that there is no legitimate difference between the person and the entity, thereby nullifying the entity.  

If you want the best protection, you need to make the entity look as different from the founder as possible.    It should have more than one owner/member and assets/liabilities should never be confused.  The company should never buy your groceries or a personal car, etc.  If you drive the company car for personal errands more than for business, you are asking for trouble, etc. 

I am not a lawyer but I do suggest you speak to one about the ins and outs.  And by all means, listen to that podcast.

Fascinating conversation!  

I'm just getting back into the game and have been considering where to incorporate.  I live in MD but I'm within 3 miles of PA and DE so all three states are viable.  My initial thoughts were DE because it's so tax friendly but CLEARLY I need to talk to a good attorney!

Thanks 

Daniel Mohnkern

I'll definitely check out the podcasts! 

Doesn't sound like you have much choice but to close the transaction in your wife's name.  The questions is what to do after you close.  You need to watch out for the "Due On Sale" clause on the mortgage.  If you aren't sure what that means, it's time to find out. 

It is sometimes possible to transfer property into a trust for without triggering the DOS clause. This offers limited protection. It's also how you word your lease agreements and who you show as the landlord. You should consult with a local attorney before writing any lease agreements.

Consider titling to a land trust with your wife as beneficiary.  Then after closing you can make the LCC the trust beneficiary.  That won't trigger any Due On Sale clauses in your note.