Setting up a corporate entity

18 Replies

I currently have one rental property, which is in my name. I have been inquiring about transferring ownership to corporate entity in order to protect my assets. The rental property is in North Carolina and I have been advised by an online service to transfer it to a North Carolina LLC and then create a Wyoming LLC which will act as a holding company for the North Carolina LLC. Can anyone shed some light on the situation or advise on whether this would be a good move?

@Dennis Griffith just a few thoughts from an attorney in Wyoming. First do you manage the property you own yourself? If so setting up multiple entities to own it is of little use anything you do personally can create a lawsuit that will bypass all of your entities. If you have a property manager a single layer of LLC protection will probably be sufficient. You also have to keep in mind that running that many entities for a single property will probably kill any chance of profit. You have to 2 sets of annual minutes, 2 sets of books, 2 bank accounts, 2 tax returns, 2 annual license fees, two registered agents, etc. Get the idea? Another thing to consider is what is your net worth. if you are worth $100K then just get good insurance, and lots of it. If you are worth a million dollars then set up an entity. There are a lot of factors to consider. For now you might just get a North Carolina LLC and run everything through that. I would suggest you talk to an accountant and your banker on tax issues and if the bank won't call your loan if you transfer title. I would also suggest reading up on how to properly manage your LLC so you do not get the corporate veil pierced if someone files a lawsuit. I hope this helps a little. I know it is very vague, but there is a lot that I am simplifying.

@Jerry W.

Scenario/question

I have a duplex and it has a walk way which a has crumbling concrete.  A tenant's friend stops over for a visits and gets hurt at night after tripping on the walkway. 

Case 1

I have an LLC and a property management company. The outcome is an outside attack does not get my personal assets.

Case 2

I have an LLC and no property management company. The outcome is an outside attack gets my personal assets.

Seems as thought a judgment creditor could still sue my personally for hiring an incompetent property manager.

Asset protection (which is what the original post asked) and anonymity. If you are looking to liability then none but with the right insurance and provided you are adhering to landlord tenant law by owning and operating safe habitable dwellings, you are in good place. Do I have LLC's and a S Corp and even some LP's? Yes but I would not have those entities if I only had one rental property.

Originally posted by @Account Closed :

@Jerry W.

Scenario/question

I have a duplex and it has a walk way which a has crumbling concrete.  A tenant's friend stops over for a visits and gets hurt at night after tripping on the walkway. 

Case 1

I have an LLC and a property management company. The outcome is an outside attack does not get my personal assets.

Case 2

I have an LLC and no property management company. The outcome is an outside attack gets my personal assets.

Seems as thought a judgment creditor could still sue my personally for hiring an incompetent property manager.

With the caveat that I'm not a legal professional, I do have the benefit of expert counsel. Here's what he has taught me...

As I understand it, a single member LLC offers almost no protection. Better protection is offered by a multi-member LLC, especially where multiple members are not an actual human person, rather a business entity eligible to be a member of an LLC. You control the entity which, if structured properly, protects your personal identity.

Typically, you control a personal trust which is a member of the LLC. The beneficiary of a trust is, I believe, not knowledge easily uncovered. Another LLC member might be your S-Corp through which you run your income subject to self employment tax allowing you to do a salary / dividend split and minimize your SE taxes.

Again, this is not legal advice, and I'm not the legal expert, but I can turn you on to one.

David J Dachtera

"Success is not a destination. Failure is not an event. Success is a process, failure is a choice."
- DJ Benedict

@Robert LaBrie all cases are fact driven.  Let me try to give you the information on how they work so you can decide for yourself.

First a lawsuit is based on 4 main things: 1) Duty, 2) Breach of duty, 3) damages, 4) direct causal effect from breach to the damage.

So the first question is what is your duty? If you own a property then it is your duty to make it safe or at least in code. If the property is owned by an LLC then the LLC has a duty to make it safe. If you manage the property then as manager you breached your duty by not having the owner fix it, you have personal liability. If you have a management company who is responsible then you have a duty to supply funds to fix it. If you have done this great, if not then your company might be liable. Keep in mind that many management companies have indemnity clauses if they are sued, I hate them. The good news is they also have insurance.

The causal effect plays a large role, did they fall because they were drunk? Not your fault.  Did they fall be cause the outside porch light burned out? Well is it your tenant's duty to replace light bulbs?  Is it the duty of your tenant to send you an email of dangerous conditions so you can fix them?  Did they send an email saying the sidewalk was dangerous?  Is it the first or 10th person who has stumbled there?  There are many factors to consider.

As to negligent hiring that is possible but much more difficult to prove.  Again that is fact driven.  If you hire a local drunk who is incompetent that is bad.  If you hire a company who manages 200 units and has insurance and bonding you might be pretty good.  So many variables.

@David Dachtera

I thought tax returns and certain land record instruments could allow a judgement creditor to determine who the beneficiary is.  Plus of course, if asked in court what assets you own, short of perjury you would need to disclose you are the beneficiary of that trust which holds the property.  Then again I could be wrong.  

@Jerry W.

I follow what your saying.  It is thought provoking.  I never considered having a management company, to impart, limit my liability.  Maybe limit my LLCs liability but not mine.  

I guess the way I look at is why not setup an LLC in Nevada, have a great insurance policy, have a hefty mortgage on a rental and do all I can to protect myself. Does not cost me much and hopefully every little bit helps in deterring a suit in the first place.

Thanks for  that answer.  Most appreciated.

@Jerry W. I have a management company that manages the property for me. The idea behind setting up the Wyoming LLC as a holding company is that any future investment properties I acquire would be held under it. You bring up an interesting point regarding the bank calling the loan if I transfer title. I will certainly take your advice and talk to a local professional about that possibility. Are you aware of banks taking that type of action?

Hi Dennis,


Look at the terms of you loan. It most likely will have due on sale clause which will call the loan due upon any transfer in title. Even if you are a member of the LLC, your loan will most likely not allow it to be transferred to an LLC. This does happen in cases of transferring to LLC as well as with Lease Options and I have known people who have had their loans called due for both reasons. Of course your lender will be the only person who will be able to answer this question for you.

Thanks,

Cheryl

Originally posted by @Account Closed :

@David Dachtera

I thought tax returns and certain land record instruments could allow a judgement creditor to determine who the beneficiary is.  Plus of course, if asked in court what assets you own, short of perjury you would need to disclose you are the beneficiary of that trust which holds the property.  Then again I could be wrong.  

Again, Check with your attorney. My WAG is that certain documents are privacy protected or inadmissible for some reason. I believe that for trusts, the trustee name is not protected (public record), but the beneficiary is protected. 

Being a beneficiary may or may not constitute ownership. You may "own" a trust where your daughter is the beneficiary and a bank/rep. is the trustee, for example. (I think.) The trust holds title (ownership) of the asset until the trustee is requested to convey it.

I'm not sure any court other than bankruptcy court could ask that, anyway.

Again, Check with your attorney. LOTTA misconceptions floating around. 

David J Dachtera

"Success is not a destination. Failure is not an event. Success is a process, failure is a choice."
- DJ Benedict