Residential Real Estate Agent · Columbus, OH · Member since 2013 · 281 posts · 110 votes
My first rental I put under an LLC with a partner, my second was conventional with my wife, the next one i'm working on with my LLC partner should be moving forward soon. I originally had anticipated putting the loan under an LLC again but are there any legal/financial advantages of closing under the LLC name vs conventional?
My original one was a non-conforming condo so had to do a portfolio loan on it anyways so it just worked out to close under LLC. I originally intended to continue to do that to keep everything seperated for legal reasons but If I seperate everything anyways and just do conventional financing and quit clame am I really taking on any additional risk?
I am going to go out on a limb here and assume that these lawyers hire you to investigate because they suspect fraud, and probably had logical reasons for their suspicions. I am also going to go out on a limb and assume they these lawyers do not hire you to investigate a LLC when they DO NOT suspect fraud.
So perhaps you are jaded by the findings that you should have logically expected?
It depends on whether or not you have to provide a personal guarantee on the mortgages through the LLC. If you do, then you gain nothing by going the LLC route and might as well place them property in a land trust to buy yourself some anonymity. However, if you are not personally guaranteeing the mortgage, you bet there are benefits!
The LLC, because it is a corporate, protects the individual from the liabilities of the company. If the company defaults, individual members of the LLC have no liability, unless they have provide personal guarantees, which negates the reason to use the LLC. This is commonly referred to as the "corporate veil". The "veil" is only pierced when an officer of the corporation (or a member of the LLC) knowingly and willingly commits or participates in fraud or other illegal activities within the corporation. (Think Enron!)
As long as you're not acting illegally or engaging in fraud, you can't be held responsible for liabilities of the corporation. It's why Donald Trump can file bankruptcy multiple times and be back in business the next day. He simply starts up a new LLC.
I don't know about the laws governing LLC structure in Ohio, but in Texas we have the Series LLC available, as do some other states. The Series LLC allows you to have "mini" LLC's (called Series) within an LLC. As long as the accounting clearly segregates the assets and liabilities of each Series, each Series operates as a standalone entity that can engage in it's own business, enter into contracts, sue and be sued, and even file for bankruptcy without its liabilities transferring to either the parent LLC or the other Series. Pretty cools stuff.
I do agree with you a little but the people that sit up LLCs most of the time will lie or provide misleading information when they are trying to cover their tracks in an LLC over the years I have seen 6 out of 10 LLC owners had fraud on their mind when they put their LLC together and in Texas the LLC and the owner personal can get sued. Get a good insurance policy and be protected.
This seems to be a continual theme with you. You have obviously had bad experiences with LLC members. I don't believe the majority of folks form LLC's with the intention of defrauding anyone.
Your statement about LLC members & managers being sued is slightly misleading. Anyone can be sued at any time. However, in the case of a member/manager of an LLC, unless fraud or other intentional misdoing can be proven, the suit against you individually gets dropped.
Insurance policies are great, but every policy has limits. I believe a comprehensive plan leverages both the appropriate entity structure AND insurance.
LLCs and corporations are my bread and butter and the reason I say that lawyers here in Dallas hire me to do an investigation into LLCs they are suing, and I see it all the time and when I starting tearing the LLC apart I find a lot of fraud on the behalf of the owner of the LLC and then the truth come out when a deposition under oath is given.
And, if there was indeed intentional fraud & illegalities, then shame on them. Like the Enron yo-yo's, they deserve to be assigned personal liability.
None of that negates the validity of the "corporate veil" or its intent. And, it's why I caveat it every time I say it...the appropriate structure will protect you, unless you forfeit your protection by acting like a criminal. Again, insurance is a part of it. It just isn't the end all be all by itself.
I am going to go out on a limb here and assume that these lawyers hire you to investigate because they suspect fraud, and probably had logical reasons for their suspicions. I am also going to go out on a limb and assume they these lawyers do not hire you to investigate a LLC when they DO NOT suspect fraud.
So perhaps you are jaded by the findings that you should have logically expected?
I will go out on the limb to answer your question. The only way to determined fraud is to investigate the LLC and its owners and if my report says no fraud, then it is still up to the lawyer to move forward or not most of the time they will not. I am going out on the limb again. A while back, someone got hurt at a rental home by tripping over a slab of concrete sticking out of the ground, and all the person asks to pay my doctor bills, and the owner told him to get off his property, and he hired a lawyer and the lawyer passes the file to me, and I went to visit the home and to take pictures an, I found the concrete sticking out of the ground, and then I started my investigation and found out the home was finance, and he transfers it into an LLC, and he did not have insurance coverage as required by the bank, and I found another rental property he has free and clear that the lawyer will go after, and I contacted the bank and now the bank will send the borrower a letter that they can do a due on sale clause, and then the borrower will transfer the home back into his name and then the LLC will play no part when the lawyer sues all this over $700 in doctor bills. Very stupid landlord
This subject gets overly complicated all the time. Most times your better off having some form of entity holding the property, trust, corp, LLC, et. al. You always carry insurance on your properties. (Consider a umbrella policy if needed.) And third, don't commit outright fraud. No business entity or insurance company protects you when you engage in a criminal activity.
The main question I was trying to ask was whether it was beneficial to hold the mortgage under the LLC vs just the deed and have mortgage under my personal name.
If the property has some sharing arrangement for you and a business partner, opposed to a domestic partner or spouse, then yes, there is a benefit to placing the asset into an LLC. Aside from the liability shielding, which is offset by insurance, you do not have to deal with the business arrangements through title via Tenants in Common or a Joint Tenancy. Joint Tenants would mean you are equally entitled to the property and all that goes with it. Not an overly common business arrangement as no matter what capital contribution or administrative contribution is made the ownership equity is always 50/50. Tenants in Common (TIC) can be split accordingly and while not an uncommon structure, they are not as readily used as they once where with the creation and body of laws around LLC's and other similar legal structures.
The LLC can take title as a Sole Ownership and your business arrangements can be handled in the operating agreement for the LLC. This makes administration of the ownership of the asset a little bit easier. Contributions, survivorship and other issues can all be handled inside the LLC. They are sort of made for that purpose.
If the previous partner is the same as the upcoming partner, which it sounded like it is, then you can simply use the previous LLC. There is not much benefit to making a new LLC to hold each asset unless the arrangement of the partnership is different, i.e. - contributions, survivorship, etc or the assets are of sufficient size as to be concerned with large economic impacts for liability. That again is where most of the time your liability will be handled by your insurance.
The final idea there, if you purchase the asset in a natural name and transfer title via a Quick Claim Deed to the LLC, where both of you are joined, the liability of the mortgage stays with whoever's natural name it was with unless the Mortgagee formally allows the loan to be assumed by the LLC. Thus, you have to some extent, a disproportionate amount of liability onto that partner since they are indeed personally liable either via damage to credit or for deficiency and/or both.
Moral of the story, if your lender will allow you to vest and borrower in the LLC. Moral of the story is you should do it. It's cleaner and easier to work with.
I use single-member LLCs to segregate different lines of business, for ease of marketing, and to keep my name off the record, but I don't consider them effective shields against personal liability. The trouble is that in some states, a negligent manager may not not protected by the LLC's liability shield -- s/he may be personally liable to the injured. In the sidewalk example, if the manager negligently failed to repair the sidewalk, that injured party may be able to sue the manager personally and recover. Since most of us self-manage our LLCs, we are exposed to this risk.
By contrast, multi-member LLCs are very useful for determining the relationships and duties of the partners, and for delegating authority.
The whole problem with LLCs, rentals, and corporate veils is that the LLC rules are practically nonexistent, when that is the case, lawyers figure out what you can/can't do based on case law, but there isn't enough case law out there to let them know *exactly* when the "corporate veil" is compromised. If you ask ten different attorneys you'll get ten different answers. Plus case law is really only important in the state the LLC is in as well. The only definitive thing I've been told consistently, which means there must be case law to support this, is that you better not use LLC funds to pay for anything personal, or use personal funds to pay for anything that belongs in the LLC. Other than that, every atty is making assumptions of what they think will happen and what you need to do.