Flipper/Rehabber · Bainbridge Island, WA · Member since 2009 · 97 posts · 70 votes
So I understand LLCs. I'm not looking for a lesson on the benefits. I am 1 fax away from having an attorney set up my multi-member entity, Operating Agreement, etc.
I also understand the reasons why banks don't like lending to new LLC's and why they need a personal guarantor when using a commercial loan to the LLC.
My question is, doesn't that ruin your separation of liability? For example, the LLC buys a property using a commercial loan guaranteed by my personal credit. If that LLC gets sued for whatever reason, can't they come after my personal assets?
I'm looking at out-of-state buy and holds in particular. Living in Denver doesn't give me many options currently.
@Steven Tawresey that question you pose is a great one for the attorney you are paying to draft these docs rather than taking legal advice from strangers online. With that said, Personally guaranteeing a loan doesn't pierce your corporate veil, it just means that if the entity fails to pay the loan you personally are on the hook for it - not simply limited to the assets of the entity only. The property titled in your entity gives you the separation for example in a slip and fall, your entity could be sued but not you personally assuming you are set up correctly.
@Steven Tawresey that question you pose is a great one for the attorney you are paying to draft these docs rather than taking legal advice from strangers online. With that said, Personally guaranteeing a loan doesn't pierce your corporate veil, it just means that if the entity fails to pay the loan you personally are on the hook for it - not simply limited to the assets of the entity only. The property titled in your entity gives you the separation for example in a slip and fall, your entity could be sued but not you personally assuming you are set up correctly.
Thanks @Travis Sperr. I fully intend to ask my attorney the same question. Just trying to get myself informed so I can ask any follow up questions intelligently.
Echoing @Travis Sperr, don't confuse liability for loan repayment with general liability.
While you may be required to personally repay the loan, You shouldn't be on the hook personally for something like a slip and fall, which could only be satisfied by assets in the LLC, assuming there's no other way to piece the corporate veil.
There seems to be a massive misunderstanding re: an LLC's (or any other corporate entity) ability to insulate an individual from personal tort liability.
In sum:
Conducting your personal business through an LLC provides no protection against tort liability (e.g., negligence) -- which, in my estimation, accounts for 99% of all tenant or invitee v. landlord disputes. The use of corporate forms — like LLCs, S-Corporations, or Incorporation — has many important purposes, but avoiding personal tort liability for your own conduct is not one of them.
The point of an LLC is that you are no longer conducting "personal business". LLC's are separate legal entities. An individual can open themselves up to personal liability by not running the LLC (or other corporate form) correctly. LLC's can limit an individual's liability to the extent it is formed and ran correctly. The entire investment in the LLC is at risk but not assets held outside of it. There is always the risk of suit. There are a multitude of ways you can make yourself personally liable. The easiest way is to give permission in the form of a personal guarantee. It does not change the law or the nature of the LLC.
LLC members or managers are liable for their own fraudulent or tortious acts even if the acts are committed (or not committed) in the service of the LLC. Individuals can always be held personally liable for negligent, fraudulent or illegal acts or omissions. Merely operating under the umbrella of an LLC does not change this rule.
So, to use the "slip and fall" hypothetical from above -- If you own and manage a piece of property in an LLC and your tenant slips and falls on a sheet of ice and alleges that you were negligent in your performance of your landlord duties, you and all of your assets are at risk.
Stated another way, if you manage your own properties, you will not gain any liability protection by owning the asset and performing the property management under an LLC. A tenant who is injured by your negligence will sue you personally - your LLC will not protect you.
I hope everyone understands there is little protection for an individual who commits a fraudulent or negligent act. Those are bad acts and treated accordingly. That is not the issue most investors are going to face. There are many different levels of involvement and levels of fault in any given situation and each state will have its own common law and statutory scheme which spells out who is ultimately liable. Run your business right, be properly insured and always seek legal counsel when needed. A slip and fall as referenced above does not always rise to the level of negligence on a single individual's part yet an LLC can take the brunt of the suit or avoid it all together if the plaintiff ('s attorney) sees there's nothing to get.
Tom, while you might understand the nuances of the distinction you are drawing, it is a bad idea for individuals to think that there is no difference in operating under an LLC and as an individual. There are large differences.
Interesting discussion guys. Thanks for the input.
If I'm following correctly:
1) An LLC (set up and managed correctly) holding a title with a personal guarantee WILL NOT protect your personal assets if you personally manage the property and are negligible (i.e. forgot to de-ice)
2) An LLC (set up and managed correctly) holding a title with a personal guarantee WILL protect your personal assets if you use a licensed and insured property management company / contractors.
I agree. I'm not arguing that there's no difference between operating individually v. operating under a corporate umbrella.
I do, however, see quite often on this site folks assuming that operating under a corporate umbrella is an absolute shield against all liability. I just thought I'd throw my 2 cents on this thread in order to try and dispel that misconception.
It has been my experience as a practicing attorney (I practiced for 2 years so I'm the authority on absolutely nothing) that most suits brought by tenants against landlords raise a negligence claim which exposes the individual/land lord to personal liability no matter how they hold title to their asset(s). It has also been my experience that most landlords are surprised to learn that they may potentially be liable personally if the plaintiff's theory wins the day.
The personal guarantee on a loan is irrelevant to the discussion on tort liability. The personal guarantee only applies to the note holder and only in regards to the note.
Probably and should are the operative terms. As in "probably will not" and "should protect". There are no guarantees in the law. You can have a bad judge or jury. There are always exceptions to every rule. As an attorney, I would rather have an LLC between my client and the plaintiff every time.
Interesting question... the 'personal guarantee' for the LLCs business debt is sort of like you consigning a loan for someone you knew -- say the LLC. If after signing the guarantee, they decided to go try their luck in Vegas and bungled the funds, your liability 'should' technically only be for the loan that you cosigned for.
If they (the LLC) in addition to bungling the funds in Vegas caused damage to someone's property either on the way to or from Vegas, your liability doesn't (or shouldn't) extend to that as they would be liable for their actions although it may in some cases.
If the LLC defaulted on the business debt, you would definitely be personally liable for the business debt per the personal guarantee. But since commingling of funds or assets is typically a prime reason for piercing most veils, if the business was having some cash flow problems for instance, you may have to use personal funds to avoid or cure any defaults. That, from an 'asset commingling' perspective would mean the veil could be pierced and your personal assets at risk.
The LLC does not mean you can never be sued or liable. This might help:
I agree. I'm not arguing that there's no difference between operating individually v. operating under a corporate umbrella.
I do, however, see quite often on this site folks assuming that operating under a corporate umbrella is an absolute shield against all liability. I just thought I'd throw my 2 cents on this thread in order to try and dispel that misconception.
It has been my experience as a practicing attorney (I practiced for 2 years so I'm the authority on absolutely nothing) that most suits brought by tenants against landlords raise a negligence claim which exposes the individual/land lord to personal liability no matter how they hold title to their asset(s). It has also been my experience that most landlords are surprised to learn that they may potentially be liable personally if the plaintiff's theory wins the day.
That's all I'm saying.
In that case, wouldn't LLC be sued by the tenant, and then LLC would have to sue the manager of the property (even if it was managed by the owner of the LLC) to recover any judgments that were levied against LLC? Obviously, if it's a one-member LLC, that member most likely would not choose to file a lawsuit against himself...