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
- sales · Saint Petersburg, FL · Member since 2015 · 7 posts · 3 votes11y
Ok wait dont get it twisted.. THIS is nothing new, A charging order is just a judgment. There are a few ways to protect yourself from this kind of thing. First don't do dumb **** obviously.
Ok I digress. The best way when you have a clean llc and you are preparing it to hold assets is to have a "Friendly lein" on it, So what you do is you create 2 llc's One that funds the other and the one being funded buys the property. Then the Funding llc puts a lein on the Funded llc for the value of the loan, This protects the llc from outside lawsuits for them to get anything they have to take care of the lein, or stand in line and wait for it to be paid. Your bank account would be held in an llc, and that whole job of the llc is to fund your other llc (s) and place leins on them that is your protector, it holds no property and does no transactions except between the llc's.
I am not a lawyer and this is not legal advice please do your own research, This is just a strategy I use. OH and tip, for this to work real well have a nominee create the protector llc for you. this way your name is not attached to the protector. Its something i learned in asset protection class. :) Good luck in your search
- Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes11y
Originally posted by @Cameron Skinner:
@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.
No, not really. Please define "Charging Lien" my understanding of it is as I pointed out above, an attorney who is a creditor. I don't believe all judgments are charging liens, my point. It appears that a member who becomes a creditor of the same LLC, having a judgment against the LLC and other members will have a charging lien.
Are you saying all liens from any judgment are to be charging liens? Hard to believe. I drive my car, run over a Nun and 6 school kids, lose and have judgments, and they can't go after my assets, the "stock" interests I have as personal assets in ownership interests?
What is outlined appears to me is the limitation of members seeking indemnification inside the entity. The assignment interests, not applicable say to inheritance matters and then the remedy for a member who is also a creditor.
And, in the big picture here on BP, we try not to speak of specific state law or requirements as if they are applicable on the national field.
LLCs are destroyed everyday, they are not bullet proof in any state. Not my opinion but this topic has been beat to death, you can find comments by attorneys.
- Investor · Leominster, MA · Member since 2011 · 1k+ posts · 589 votes11y
Many of you are missing some very important points with this case. The first and one of the most important is that this has nothing to do with a property management company. Rick Warren is the manager of an LLC of which he is also a member. He wasn't claiming to be a property manager. The distinction is that (in many cases) an LLC with have a manager that will oversee the day-to-day operations of the LLC but does not have a financial interest (not an owner). In this case Warren is both a manager and a member. Warren's defense was that he did not personally own the properties, the LLC owns them.
As far as the Olmstead case, that really has nothing to do with this situation. That case is about creditors getting money from the members (owners of an LLC). It doesn't matter what state you are in when it comes to certain areas of the law, the LLC will not protect you. A few of them are negligence, fraudulent activities that cause to somebody or something, and some specific violations of the tax code.
Warren was found guilty of owning or operating a vacant, open and unsecured building. He owns the buildings. It's his LLC. Now he's going to jail. This is the perfect example of why an LLC will not protect you from a lawsuit.
Every day new members here on BP start googling "piercing the corporate veil" and they post about how to set up their LLC and they talk about their LLCs having children and creating more LLCs. Then they set up an LLC to oversee the management of properties they don't own yet and they set up 16 bank accounts. As one commenter above pointed out, an LLC can't go to jail. I hate to continue this LLC debate but it's pretty clear that 90+% of people here spend way too much money on LLCs with false hopes of protecting themselves and/or their assets (and most really have no assets to protect anyways) because they read Rich Dad Poor Dad or any of a number of gurus books that bring nothing of value for the real estate investment business.
Interesting thread though....
- Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes11y
@Mindy Jensen, an LLC (Limited Liability Company) by definition is intended to LIMIT the owners personal financial liability, but NOT to eliminate it. (Criminal liability is a different subject altogether - which Mr Warren should have known, as well as the ownership vs management outcome).
Financially, the reason for taking out LLC's in the first place is that because anyone CAN be sued, the LLC creates a "corporate veil", so that Mr Warren's personal home for example, which likely WASN'T "owned" by the (sued) LLC, wouldn't be able to be taken away from him (purportedly), BECAUSE it's not within that LLC. So, Mr Warren's personal Liability within each LLC is still LIMITED, but not ELIMINATED. [Not legal advice. Also, please let me know if I am off-base]...
- BiggerPockets Money Podcast Host · Longmont, CO · Member since 2014 · 7k+ posts · 10k+ votes11y
Thanks for the back story, @Mark Graffagnino. I read a few of the articles, but I didn't come across that one. Not a really smart move on Warren's part.
@Rob Beland, thanks for the clarification. That is what I was trying to point out. His whole defense was that he didn't own them, the LLC did. An LLC is not a suit of armor, and it won't protect you from everything.
- BiggerPockets Money Podcast Host · Longmont, CO · Member since 2014 · 7k+ posts · 10k+ votes11y
@Steve B., I am not saying they are worthless at all. I'm saying they aren't iron-clad. I think many people believe that an LLC will protect them from anything, and that simply isn't the case.
- Investor · Leominster, MA · Member since 2011 · 1k+ posts · 589 votes11y
I agree with @Mindy Jensen. Nobody is saying they are worthless.They do have a place in real estate investing. The problem @Steve B.is that people are misinformed and spend thousands of dollars setting up an LLC to protect assets they don't have and to avoid lawsuits that an LLC won't even protect them from.
- Engineer · Portland, OR · Member since 2014 · 1k+ posts · 1k+ votes11y
makes sense. As is often mentioned as your first step in protecting your assets, get a nice umbrella policy, just don't expect that your insurance company won't try to weasel out of it via section 2, paragraph 7. clause 15 when that two million dollar slip and fall comes down the pipe . if your someone with actual, paid for, assets to protect, a LLC is a good 2nd line of defense
- Jerusalem, Israel · Member since 2015 · 144 posts · 14 votes11y
As the name entails - Limited Liability. LIMITED is not the same as NONE.
Best of luck!
- Lender · Granite Bay, CA · Member since 2014 · 456 posts · 454 votes11y
People always think they can escape all liability by using LLC's or corporations. They are called "LIMITED" liability for a reason, it's because it is limited! If you are reckless or dishonest with your decisions, a good attorney will attempt to hold you personally liable. There are many many cases where this has happened.
- Investor · Thermopolis, WY · Member since 2012 · 4k+ posts · 4k+ votes11y
I have written posts on this area many times and do not intend to do a full article again. Please look up old threads. To shorten things up, an LLC will not protect you from a criminal act. You hit someone in the nose you are personally liable even if you were doing business as an LLC. If property was owned by an LLC someone had to be making decisions for the LLC in order to conduct business. If those decisions resulted in criminal acts the person making the decision would be liable. That is true if he is a property manager or the LLC managing member. I could not discern that from the article.
@Cameron Skinner had it correct in that LLCs work well for certain things. They do protect your assets from debts of the LLC. If you owned the LLC property personally and someone sued for a negligent act, your personal assets could be sold to satisfy the judgement. There is a reason why every state has law establishing LLCs and why millions of people use them. It is not because they are worthless. It is because they work. To say otherwise is a disregard for reality. It is not common to pierce the veil, but it can be done in the right circumstances. Most attacks are shot down by summary judgement. You are always personally liable for any act you do personally. If an LLC hires a hit man to kill someone, there was still a person who solicited the act and conspired to murder another. That is different from an LLC going bankrupt because a faulty furnace killed 3 folks by carbon monoxide poisoning and had 3 million dollar judgement against it. The biggest cause of piercing the corporate veil is not observing corporate formalities. There was also a case in Colorado where they went to the assets of an LLC without piercing the veil using standard reasons. Piercing is very rare without good reasons behind it. To say anyone kid out of lawschool can pierce one is dead wrong. There is a reason that no person with substantial assets does business outside of a corporate entity. LLCs had advantages over corporations as they can get your stock ownership but not your LLC ownership due to its partnership nature.
- Investor · Panama City, FL · Member since 2015 · 378 posts · 183 votes11y
I just want to suggest that's every individual out there has a different set of circumstances, does everyone on BP need a series LLC owned by a foreign trust? of course not, does everyone on BP just need to hold all their properties in their personal name and just get a big insurance policy? of course not. I think the point is to kick around ideas see what others are doing, so you can do a little research yourself to pick the right structure for you unique individual circumstances. Good luck!
- Bedford, NH · Member since 2012 · 2k+ posts · 1k+ votes11y
Originally posted by @Jerry W.:
I have written posts on this area many times and do not intend to do a full article again. Please look up old threads. To shorten things up, an LLC will not protect you from a criminal act. You hit someone in the nose you are personally liable even if you were doing business as an LLC. If property was owned by an LLC someone had to be making decisions for the LLC in order to conduct business. If those decisions resulted in criminal acts the person making the decision would be liable. That is true if he is a property manager or the LLC managing member. I could not discern that from the article.
@Cameron Skinner had it correct in that LLCs work well for certain things. They do protect your assets from debts of the LLC. If you owned the LLC property personally and someone sued for a negligent act, your personal assets could be sold to satisfy the judgement. There is a reason why every state has law establishing LLCs and why millions of people use them. It is not because they are worthless. It is because they work. To say otherwise is a disregard for reality. It is not common to pierce the veil, but it can be done in the right circumstances. Most attacks are shot down by summary judgement. You are always personally liable for any act you do personally. If an LLC hires a hit man to kill someone, there was still a person who solicited the act and conspired to murder another. That is different from an LLC going bankrupt because a faulty furnace killed 3 folks by carbon monoxide poisoning and had 3 million dollar judgement against it. The biggest cause of piercing the corporate veil is not observing corporate formalities. There was also a case in Colorado where they went to the assets of an LLC without piercing the veil using standard reasons. Piercing is very rare without good reasons behind it. To say anyone kid out of lawschool can pierce one is dead wrong. There is a reason that no person with substantial assets does business outside of a corporate entity. LLCs had advantages over corporations as they can get your stock ownership but not your LLC ownership due to its partnership nature.
I want to point out, I wrote that any kid out of law school could pierce an LLC OF THE SORT MOST SMALL-TIME INVESTORS SET UP.
I absolutely stand by that statement. What percentage of LLCs, especially single-member LLCs, do you think DO observe the corporate formalities? I'm going to guess not more than 10%.
- Investor · Glen Allen, VA · Member since 2015 · 8 posts · 10 votes11y
This information is good to know. Also makes a lot of sense.
- Investor · Panama City, FL · Member since 2015 · 378 posts · 183 votes11y
@Richard C. LLCs are not corporations they were specifically designed by state legislatures to provide a level of protection for small business owners without the need for the formalities of corporate governance. Back in the early 90s small s-corps were losing their liability protections in courts because they weren't keeping corporate minutes, not holding annual meetings ect. State legislatures feared this would prevent people from starting new businesses in their state for fear they may lose their own own personal assets in the ever increasing litigious environment. Most state statutes read as long as it's a bonafide business venture the owners are protected from liability and debts created with in the scope of the business. My business law professor at Florida State was actually on the committees that wrote the original legislation so he spent a lot of time on teaching about them.
Also I can speak to my own personal experience when My wife was sued, my attorney says don't worry you set everything up right once they realize their is nothing they can get they will drop the suit. Got Interrogators, basically bunch of questions of what we own, all our properties grouped in several LLCs, I do have a couple of homes in my own and my wife's individual name but they have big loans and little equity. Even my cars are owned by one of my companies. Once they realized I didn't have a umbrella liability policy and nothing our personal name without a big loan they dropped the case.
Just what I've experienced, everyone is entitled to their opinion, Good luck!
- Investor · Leominster, MA · Member since 2011 · 1k+ posts · 589 votes11y
@Cameron Skinnerwhy was your wife sued? Was it a case of negligence or simply trying to attach assets to a debt? A "sue everybody" case and see what sticks? Whats the rest of the story?
- Kutztown, PA · Member since 2015 · 3 posts · 3 votes11y
I gather, depending on the type of property management company, and the details of the contract with the owner the manager may have a case. For example, if the management company is only contractually responsible for grounds keeping like lawn mowing and landscaping he/she may have a way out of obligation by law.
- Investor · Thermopolis, WY · Member since 2012 · 4k+ posts · 4k+ votes11y
Originally posted by @Richard C.:
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.
Let me clear this up. You are dead wrong. You are giving out advice that will make folks think there is no use in setting up an LLC. Are you going to indemnify someone who loses their house or savings because they did not set an LLC when they should have? That is what can happen when you give faulty advice because of lack of knowledge. Most folks will have a tax accountant who steers them into keeping their books right. Even an LLC not done right exactly right provides a lot of liability protection. I have done lawsuits attacking and defending piercing cases. How many have you done? It is great to spout things thinking you are right, but you best be dam sure. You don't have to tell their kids no college because dad lost everything due to a slip and fall case on a rental. If you want I would be glad to link in a half dozen more professionals on here or attorneys, and have them give the same opinion. No advice is better than bad advice.
- Investor · Thermopolis, WY · Member since 2012 · 4k+ posts · 4k+ votes11y
@Cameron Skinner there is a type of corporation called a closed corporation that specifically does not require annual minutes. There is some type of restriction on the number of members and often they must be family members or other limiting factors enclosed. there are special warnings required on the certificates, etc. I have not seen piercings done because of lack of minutes. The main cases I have seen succeed are undercapitalized, and using corporate funds for personal use. Often discovery will not get you to corporate minutes before the summary judgement hearing. You usually have to some meat before a judge lets you go on a fishing expedition with discovery. This could vary from state to state and judge to judge. I am rusty, I have not done one for at least 8 years.
- Investor · Chorley, Lancashire · Member since 2013 · 82 posts · 22 votes11y
The old LLC issue raises its ugly head. This is something that I need to take professional advice on. I guess other newbies should do the same. You pay now or pay later.
I have heard that this issue is one that puts off some investors, yes it can be a hurdle but not a bar to becoming an investor. Nothing should be a bar to achieving your dreams,through realestate.
BP is a great place to turn those bars into little hurdles that In time you can easily step right over as you gain knowledge and experience.
- Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes11y
I am not going to get into it but it's obvious there are political and other kinds of motives going on with this story. This case should be removed from that area and placed in a neutral area where each side has a non-bias going on.
There are two forces at play. Some people that stay there obviously want this developer to clean up their community at HIS expense even if losing money. This person does not control gang and drug activity. Of course this person isn't going to keep rebuilding a house over and over to maintain standards. That would suck out any potential profit on the down line when they sell or JV on the future development partnership.
Kasim Reed lost the Braves in Atlanta to the new stadium in Cobb county because he thought they had no other options and did a power play. We all saw how that played out.
The developer is just trying to get some rents to off sett the code violations and pay property taxes until the big money and growth gets there.
Bulldozing the houses is cheap and runs usually 10k or so to scrape and clean. I think even if you try to scrape them the community would say " This evil outside developer is tearing down our community and forcing us to leave .....blah, blah, blah. " He will be crucified and vilified no matter what for him wanting a personal gain at what they think is their expense.
A pancake no matter how flat you make it always has 2 sides.
In my view this developer made some mistakes.
1. He should have thought out the gain for the time invested and his carrying costs. Think out multiple strategies of keeping the houses up with heavy ongoing repairs OR scraping and let sit their with no income and pay taxes until the payoff happens later on..
2. What I call the "HASSLE FACTOR". What payoff will I get and how much of a PITA will it be to get there?? People look at the numbers only many times but development is 90% political and perceived reality. I assembled land for big commercial developers so I know this game pretty good. You will NEVER make everyone happy in a deal. Often times letting an initial developer starts something with the heavy lifting and then coming in to buy a fractured development for pennies on the dollar is a better strategy.
If someone had to hold these for 4 or 5 years and deal with all the drama just to get a land bank payoff of XX then it wouldn't be worth it to me. I think there are much better opportunities in the MSA area that are not in war zone areas.
Case in point: One of my clients in another state has a retail development they bought mid development. It was started 7 years ago. Original developer went under and another more experience developer bought it and moved it to 70% complete for the project. That developers bread and butter is building STNL and not MTNL so they sold to my client with about 4 million upside left on the bone after we finish build out.
Excellent area and the STNL developer made a few mill from where they bought it and my client is doing very well with it. The original developers who bought the land and started the whole thing got a big fat goose egg and a lot of grief dealing with initial land buying stages and development.
The LLC, umbrella insurance, etc. are just tools. If you are going to be sued you are going to be sued. There is a saying that if you haven't been sued yet you haven't been in the business long enough. Most of these things are settled out of court. It's faster and everyone gets their money quicker and moves on with their lives. Now if a case has no merit then the other party is told to go pound sand. Many filers do not have any money to their names and are on a fishing trip to score a big one. The attorneys though do not like working pro bono unless they feel the case is almost can't lose. If it's iffy the attorney wants money and the people that do not have it often say drop it.
I am just sharing random thoughts and no legal advice given.
- Investor · Carrollton, TX · Member since 2015 · 109 posts · 76 votes11y
Originally posted by @Cameron Skinner:
@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.
100% of the profits of a LLC are taxed in the year they are earned. This is the case whether you file a Schedule C, 1065, 1120s or 1120 tax form. It's true of all business entities. The only thing that changes is that, if you chose to file as a C-Corp for some reason, the profits that flow to the members of the LLC would be taxed as qualified dividends as opposed to ordinary income on the personal 1040's. In pass through entities the income is taxed for the first time at the individual level. But in any case, 100% of the profits are taxed in the year they are earned.
For the IRS' purpose, there are only two types of income. Passive and Earned. The entity structure just determines which entity pays the taxes, but you cannot avoid taxes. An S-Corp LLC vs. a partnership LLC gets taxed the same way. Earned income getting the double whammy of FICA vs. passive. But from an INCOME tax standpoint they are taxed the same.
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