Investor NOT protected by LLC?!?
Mindy JensenPro Member
BiggerPockets Money Podcast Host · Longmont, CO · Member since 2014 · 7k+ posts · 10k+ votesInvestor NOT protected by LLC?!?
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Rental Property Investor · Northern, CA · Member since 2012 · 5k+ posts · 5k+ votes
11yGenerally speaking, LLC's are designed to protect your personal assets in the event someone pursues a claim against the business. It's not designed to protect someone from responsibility when it comes to a jailable offense. You can't put a LLC in jail. Some PERSON has to be held responsible, and it happens all the time. Ever watch American Greed? Presidents, CEOs, and owners of companies go to jail all the time for things they did on behalf of, or while operating under, their business.
53 Replies
- BiggerPockets Money Podcast Host · Longmont, CO · Member since 2014 · 7k+ posts · 10k+ votes11y
@Eddie T., that's a great idea. I'm going to throw in a bunch of keywords.
Attorney, lawyer, law, LLC.
- Attorney / Investor · Salt Lake City, UT · Member since 2015 · 228 posts · 198 votes11y
Management always incurs liability because the manager is responsible for the repairs and upkeep. If the lawsuit was based on condition of the property, they will certainly go after the property manager. The manager will try and deflect to the owner, and they might battle it out to see who's ultimately liable. Most property management agreements try to pass liability to owners, but it doesn't always stick. Managers have a fiduciary responsibility. If it's your job to maintain a premises, then you're liable if you don't. All property managers should be working through their own business entity for liability protection.
Jeff
- New to Real Estate · Ogden · Member since 2014 · 107 posts · 19 votes11y
Do you Really have to have any legal to say, ah-duh! You're the MANAGER, which equates to you are RESPONSIBLE.
Hiding behind contractual technicalities and perverting the law for self benefit never wins. Even if you think you have won, time always deals a healthy dose of karma.
- Investor · Atlanta, GA · Member since 2013 · 212 posts · 107 votes11y
These are quasi-criminal code violations, not civil claims. An LLC does not protect you, as manager, from criminal conduct. The reason is fairly logical: the LLC can only act through flesh-and-blood people and the people are responsible for complying with the law.
- Investor · New York City, NY · Member since 2015 · 808 posts · 417 votes11y
From what I can understand it may be similar to why a company had insurance for fiduciaries because they are liable for the actions if they fail in their fiduciary obligations.
- Rental Property Investor · Northern, CA · Member since 2012 · 5k+ posts · 5k+ votes11y
Generally speaking, LLC's are designed to protect your personal assets in the event someone pursues a claim against the business. It's not designed to protect someone from responsibility when it comes to a jailable offense. You can't put a LLC in jail. Some PERSON has to be held responsible, and it happens all the time. Ever watch American Greed? Presidents, CEOs, and owners of companies go to jail all the time for things they did on behalf of, or while operating under, their business.
- investor · McDonough, GA · Member since 2015 · 230 posts · 77 votes11y
I think I will always invest in buy and holds that I can be proud of. It's tempting to buy up some of the cheap houses I see between Atlanta and Macon. It's not worth the risk or the headache for a newbie like me. I read in the article that some of those houses were torn down and others were rented out. Maybe all of them should have been torn down and the land held on to until it was time to sell. I guess there would be no income coming in from the land, but there probably wouldn't be any legal issues either.
- BiggerPockets Money Podcast Host · Longmont, CO · Member since 2014 · 7k+ posts · 10k+ votes11y
@Account Closed, that sounds like that would have been the best practice for this guy. Teardown and then nothing. Maybe monthly weed mowing...
- Investor · Juneau, AK · Member since 2015 · 980 posts · 741 votes11y
There are several reasons when a court may disregard a corporate entity. Each situation depends on its exact facts and circumstances and the state law. As mentioned above, the properly formed and maintained entity can be helpful to protect against a civil liability for negligence for example. But the type of conduct is relevant. Fraud, for example, or (I just glanced at the article) repeat bad housing code violations or criminal conduct could be reasons to disregard the entity, as the person is using it to commit a wrongful act ....
- Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes11y
Originally posted by @Mindy Jensen:
A new development out of Atlanta this week. An investor has been held liable for the exceptionally poor conditions of his properties, even though they were held by an LLC that was not under his own name.
He argued that since he was not the owner or operator, but simply the manager, that he shouldn't be held responsible for the property conditions.
Check out this article about the verdict and this one about his arguments against being hld liable.
What do you think?
Bad argument obviously since a manager can be liable for negligence in their duties. The links did not work for me, never saw the "edit unlink" message and it went nowhere.
I'm guessing he was behind the door as the beneficial owner of the entity as well.
My thought is; if the authorities want compliance, they will get compliance. :)
- Investor · Panama City, FL · Member since 2015 · 378 posts · 183 votes11y
you can never avoid personal liability with an LLC for example if I own coca cola stock and the coca cola truck driver runs over sombody they can't sue me just cause I own the stock. But if I happen to work for coca cola and I was diving the truck they can sue me because I was driving and the coca cola company because they own the truck. This is something to always consider if you are doing electrical or structural repairs yourself. If you fix a light socket wrong and the house burns down you might be held liable, but if you hire an electrician they could go after LLC but not you personally
This is why I use multiple LLCs and own little in my own name. In FL if I'm sued personally they can only get a charging lien againt the LLCs I own. These are really hard to collect on and they can can only take money that the LLC distributes to the owners. So of course if you have a lien you just don't make any distributions. Your LLC just ends up sending you to a BP met up in Hawaii for networking, buys a boat to wine and dine investors, and a couple of really nice cars. While irs would not let you right off some or all of these expenses, you still,didn't take any distributions out of the LLC. In addition the charging lien could create a tax consequence for the lien holder. Just my thoughts
- Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes11y
Originally posted by @Cameron Skinner:
you can never avoid personal liability with an LLC for example if I own coca cola stock and the coca cola truck driver runs over sombody they can't sue me just cause I own the stock. But if I happen to work for coca cola and I was diving the truck they can sue me because I was driving and the coca cola company because they own the truck. This is something to always consider if you are doing electrical or structural repairs yourself. If you fix a light socket wrong and the house burns down you might be held liable, but if you hire an electrician they could go after LLC but not you personally
This is why I use multiple LLCs and own little in my own name. In FL if I'm sued personally they can only get a charging lien againt the LLCs I own. These are really hard to collect on and they can can only take money that the LLC distributes to the owners. So of course if you have a lien you just don't make any distributions. Your LLC just ends up sending you to a BP met up in Hawaii for networking, buys a boat to wine and dine investors, and a couple of really nice cars. While irs would not let you right off some or all of these expenses, you still,didn't take any distributions out of the LLC. In addition the charging lien could create a tax consequence for the lien holder. Just my thoughts
The coke truck doesn't warrant a comment, that other stuff certainly does. You need to speak to an attorney and a CPA, buying unrelated assets with far fetched justifications you are distributing funds for the benefit of owners and doing so in an attempt to avoid a judgment is an illegal distribution. Let's not try to out smart the system with personal logic. I believe this is partly how Jim Baker went to prison. :)
- Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes11y
Thanks for posting @Mindy Jensen this concept is nothing new, but many that create LLCs don't understand the concept that you are always responsible for your own actions. So thanks for bring it to attention.
While I won't defend him on run down rentals I think it is unfortunate that society wants to hold him responsible for vacant properties and drug trade which he did not create.
- Investor · Panama City, FL · Member since 2015 · 378 posts · 183 votes11y
@Bill Gulley my suggestions on using up your income was exaggerated to make the point that charging liens are extremely difficult to collect, because owners can always find creative ways not to make any money, and even if they do they can just leave it in the company and not take distributions. If your LLC makes income but you decide not to distribute to owners you still owe income tax. If there is a charging lien the owner of the lien can end up owing tax on the profits that are still just sitting in the LLC so attorneys rarely even bother going after a charging liens. Of course this is FL and every state is different. Hope this clarifies.
Nothing in asset protection is 100% the goal is just to make it cost ineffective to go after you. If I have 50k in equity in an LLC is it really worth 40k in legal fees to try and crack into my LLC and prove my tip to Hawaii to a real estate conference was not a bonafide business expense?
- Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes11y
Originally posted by @Cameron Skinner:
@Bill Gulley my suggestions on using up your income was exaggerated to make the point that charging liens are extremely difficult to collect, because owners can always find creative ways not to make any money, and even if they do they can just leave it in the company and not take distributions. If your LLC makes income but you decide not to distribute to owners you still owe income tax. If there is a charging lien the owner of the lien can end up owing tax on the profits that are still just sitting in the LLC so attorneys rarely even bother going after a charging liens. Of course this is FL and every state is different. Hope this clarifies.
Nothing in asset protection is 100% the goal is just to make it cost ineffective to go after you. If I have 50k in equity in an LLC is it really worth 40k in legal fees to try and crack into my LLC and prove my tip to Hawaii to a real estate conference was not a bonafide business expense?
I have no idea what you have been reading, but, a "Charging Lien" is a lien by an attorney in connection with their fees for representation. Generally this type of lien goes to the case, that in the event the attorney's client prevails and restitution is made, the attorney has a lien on the proceeds. This is not a lien by judgment by a creditor.
Yes, an attorney may not track you down to the ends of the earth to collect.
The topic here is to the liability of a manager arising from violations of ordinances I believe.
We take more risk driving a car than we do holding real estate, LLC protection can certainly be beneficial but nothing is really bullet proof. :)
- Investor · Panama City, FL · Member since 2015 · 378 posts · 183 votes11y
@Bill Gulley just google "charging lien Florida LLC" also sometimes called a "charging order". Florida statue states a charging lien is the only recourse against the owner of a multi-member LLC. A charging lien in this legal definition is a claim on any distributions made to the owners of the LLC
My wife and one of my LLCs was sued few years ago, one tenants dog bit another so I have real first hand knowledge how this stuff works, and plays out in a real life case.
- Madison Heights, MI · Member since 2014 · 471 posts · 132 votes11y
I really can't relate to landlords (slumlords) that don't take care of their properties or even bother to register them as rentals. Pay the fee, get the inspection, complete the repairs list. How hard is that? Heck, I tell on myself if I forget to pay an inspection fee..
- Investor · Panama City, FL · Member since 2015 · 378 posts · 183 votes11y
@Bill Gulley FYI, hope this helps, good luck!
from Alperlaw.com
One practical limitation with the multi-member LLC or partnership charging lien protection is that the debtor's cash and assets can remain trapped inside the entity as a "patient creditor" holds its charging lien anticipating future distributions. Members and limited partners subject to charging liens have used varying means to access cash from their LLC or partnership entity to maintain a normal lifestyle. One possible solution is for the partnership or multi-member LLC to pay the debtor a reasonable salary or a guaranteed management payment which is exempt from creditors if the debtor is head of household. Or, the entity can loan money to the debtor. Another solution is for the multi-member LLC or partnership to distribute money to members in kind in the form of exempt financial products. A creditor may argue that any payment from an LLC to or for the benefit of a debtor partner/member is a disguised distribution subject to the debtor's charging order.
Also see Florida statute 608
(b) A charging order constitutes a lien on the judgment debtor’s limited liability company interest or assignee rights. Under a charging order, the judgment creditor has only the rights of an assignee of a limited liability company interest to receive any distribution or distributions to which the judgment debtor would otherwise have been entitled from the limited liability company, to the extent of the judgment, including interest.(c) This chapter does not deprive any member or member’s assignee of the benefit of any exemption law applicable to the member’s limited liability company interest or the assignee’s rights to distributions from the limited liability company.
(5) Except as provided in subsections (6) and (7), a charging order is the sole and exclusive remedy by which a judgment creditor of a member or member’s assignee may satisfy a judgment from the judgment debtor’s interest in a limited liability company or rights to distributions from the limited liability company.
- Bedford, NH · Member since 2012 · 2k+ posts · 1k+ votes11y
There is nothing new about this. For the 400th time, the vast, overwhelming majority of singleco-owner LLCs provide virtually nothing in the way of insulating you from liability or protecting you assets. Piercing the veil on the sort of LLCs most all-time investors set up to hold their properties (eg, "123 Main Street,LLC") is a task that takes some kid six months out of law school a couple of hours.
- Investor · Panama City, FL · Member since 2015 · 378 posts · 183 votes11y
@Richard C. every state is different but in FL in almost 20 years of the LLC statute only one LLC has ever been cracked, FTC vs. Olmsted and this guy just transferred all his personal assets to an LLC with no business purpose, and it still took the full legal force of the Federal government to crack it. As long as it's a bonafide business interest LLCs are almost impossible to crack, at least here in FL. As I stated earlier nothing is 100% with enough lawyers and money and time maybe my LLCs can be cracked into by an outside creditor, but our goal in asset protection is to put so many hurdles in the way it's just not cost effective to even try.
- Real Estate Broker · Naples, FL · Member since 2013 · 9k+ posts · 6k+ votes11y
If a charging order is granted, doesn't the creditor become responsible for any unpaid taxes by the LLC? I have been led to believe this but not sure if it is true. My attorney friend stated that if an LLC does not pay its taxes that the individual member can also be on the hook for them. IMO, the only sure way to avoid creditors, etc is either a)..have nothing...or b) die! I don't want either option at this point:) For these reasons, it is a great idea to act lawfully, avoid mistakes, and carry insurance. There is always someone out there lurking to see what they can take from you...justified or not.
- Contractor · Atlanta, GA · Member since 2012 · 176 posts · 103 votes11y
There is a back story to this. Last November the investor let the newspaper do a feature story on him and shadow him while he did his business down in the neighborhood. He basically admitted to owning all these homes under anonymous LLC's and talked about being down in the hood every day keeping up on things. My guess is he thought the article was going to be very positive and complimentary of what he was doing but it all backfired on him. He basically wrote his own indictment in that article. After that the Atlanta Mayor got his panties in a wad and has had a personal vendetta against this guy, so he was screwed. There are also a lot of abandoned run down properties owned by the entity set up by the City of Atlanta, but no indictments brought on them.
- Investor · Panama City, FL · Member since 2015 · 378 posts · 183 votes11y
@John Thedford if you file your LLC as an S-corp you owe tax on all your profits made in the company even if you leave all you money in the company. In some IRS private letter rulings they have taken the position if you have a charging order you have rights to the profits even if you have not received them, so the creditor owes the tax. On the other hand some courts have ruled since you have no constructive receipt the judgement creditor does not owe the tax. But usually the mere threat the IRS "can" tax you on profits that you may never see, is enough to dissuade a charging order.
- Bedford, NH · Member since 2012 · 2k+ posts · 1k+ votes11y
Originally posted by @Cameron Skinner:
@Richard C. every state is different but in FL in almost 20 years of the LLC statute only one LLC has ever been cracked, FTC vs. Olmsted and this guy just transferred all his personal assets to an LLC with no business purpose, and it still took the full legal force of the Federal government to crack it. As long as it's a bonafide business interest LLCs are almost impossible to crack, at least here in FL. As I stated earlier nothing is 100% with enough lawyers and money and time maybe my LLCs can be cracked into by an outside creditor, but our goal in asset protection is to put so many hurdles in the way it's just not cost effective to even try.
With respect, you are very seriously mistating the impact of Olmsted. I strongly suggest you contact a Florida attorney.
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