Ask Me Anything! Free legal advice
Scott SmithPro Member
Attorney · Austin, TX · Member since 2014 · 1k+ posts · 932 votesI'm the asset protection attorney out of Austin, Texas that protects real estate investors from lawsuits. What I want to know is the question you have about lawsuit protection, taxes, insurance, financing, etc. as it relates to owning property in a company.
If you ask, I'll answer.
Bueller?
Bueller?
You're welcome!
Hey Scott! I had a question. I was wondering if with an FHA loan i can buy a home and live in the cottage on the property (in the back yard) and rent out the rooms in the actual house? Or would this be against FHA regulations? The house would be in my name and i would be living on the property, technically, getting my mail delivered there. Has anyone done this before? Thank you in advance for the insightful response. Greatly appreciate you helping out!
If a train left station A at 9:30 traveling west bound at 30 mph... and another train left station B at 9:45 traveling east bound....
Um... the guy who started this 6 days ago hasn't answered a single question on this thread. I'd just post your questions in the forum in stead of here.
Hey, Scott (or Lee, since you seem to be answering most questions now)
I have a couple basic questions about LLCs. Is it recommended that a separate LLC be created for each investment property, or is it fine to bundle a few together? The goal is to obtain hundreds of properties, so this made me wonder if I should have hundreds of LLCs to go along with them. Also, should the LLC be established in the state that the property is in? If so (or if not), why?
Thanks in advance for any help!
@Kimberly H. I think you are looking for the same thing I see missing from every LLC discussion. Some people insist you need an LLC and others say it is easy pierce, but nobody provides real world examples. I find it hard to believe that of all the people on BiggerPockets, nobody with an LLC has ever been sued - or even someone who doesn't have an LLC. It seems your lawyers and even @Matthew Kreitzer should have some real-world example they could give us - one they actually participated in, not a theory that they try to claim is fact. Either these lawyers have no experience or there is another explanation. My theory is that lawyers are mostly taking cases where there is an insurance policy that will pay. Injury lawyers work on contingency, so why would they take on a complicated case where they need to pierce an LLC or where they need to fight to collect a judgment? They are going to go after insurance companies that have the ability to write a check. The only exception may be if they know the owner has really deep pockets, like a large corporation. Ultimately most cases are settled. Lawyers want to get paid sooner rather than later.
Our company is a multimember LLC taxed as partnership (alabama) does this mean we must pay ourselves as employees instead of draws. The company has not yet earned any money we are working on out first flip
@Kimberly H. I think you are looking for the same thing I see missing from every LLC discussion. Some people insist you need an LLC and others say it is easy pierce, but nobody provides real world examples. I find it hard to believe that of all the people on BiggerPockets, nobody with an LLC has ever been sued - or even someone who doesn't have an LLC. It seems your lawyers and even @Matthew Kreitzer should have some real-world example they could give us - one they actually participated in, not a theory that they try to claim is fact. Either these lawyers have no experience or there is another explanation. My theory is that lawyers are mostly taking cases where there is an insurance policy that will pay. Injury lawyers work on contingency, so why would they take on a complicated case where they need to pierce an LLC or where they need to fight to collect a judgment? They are going to go after insurance companies that have the ability to write a check. The only exception may be if they know the owner has really deep pockets, like a large corporation. Ultimately most cases are settled. Lawyers want to get paid sooner rather than later.
We aren't supposed to talk about our cases on the internet. That would generally be a violation of numerous ethics rules. Yes, I have been involved in numerous cases involving LLC and Trust litigation.
@Matthew Kreitzer that is interesting I though court cases were a matter of public record.
There are legal forums on the internet where lawyers are offering free advice and talking about cases. Names omitted, to protect the innocent, etc. I don't understand why you couldn't give vague examples based on your experience or why you couldn't site specific published case law.
@Matthew Kreitzer that is interesting I though court cases were a matter of public record.
There are legal forums on the internet where lawyers are offering free advice and talking about cases. Names omitted, to protect the innocent, etc. I don't understand why you couldn't give vague examples based on your experience or why you couldn't site specific published case law.
Primarily because client confidentiality and rules of court highly encourage us not to talk about our existing cases. At most, attorneys generally talk about the number and type of cases we have dealt with, but listing any kind of identifying information above and beyond the norm could get us into trouble. Lawyers have to very carefully convey that kind of information to the public. Each state is pretty unique in this matter, and we have dozens of Legal Ethics Opinions that we have to worry about when discussing our cases.
We have to take these precautions primarily because these cases are generally matters of public record. Unless we have been previously authorized by our client to discuss their case, we shouldn't, and a savvy researcher could easily figure out which case we are talking about by doing a simple docket search for our names and similar fact patterns.
No, it is better that attorneys talk in generalities about general legal principles.
As for why we don't talk about case law;
It takes an absurd amount of work for us to drag up case law. Not only does every single case law search cost us money (and a lot of it), it takes away from our billable hours. If people want us to pull up case law, they need to pay us for it. The average vendor for case law research; Westlaw or Lexis, could easily charge us around $100 for a single case search. I'd be happy to do such a case search if someone gave me the money, but I am not giving away overheard for free legal advice.
@Joe Splitrock finally, someone who is hearing me! Thank you!
@Matthew Kreitzer Ditto Joe's question.
Cases like the 16.6 Million Dollar Chicago Fatal Porch Collapse of 2003 were 13 people died and 57 more were injured that took ten years to litigate...I can't find enough facts from articles online to really know how the owner was only out $660,000 when it doesn't appear to be in any kind of corporate structure that provides liability protection, and he owned 20-30 other buildings at the time....it appears he simply had a boatload of umbrella insurance but I can't tell anything for sure. Maybe someday when I get some free time I'll figure it out...
http://www.abajournal.com/news/article/10_years_af...
https://en.wikipedia.org/wiki/2003_Chicago_balcony_collapse
@Joe Splitrock finally, someone who is hearing me! Thank you!
@Matthew Kreitzer Ditto Joe's question.
Cases like the 16.6 Million Dollar Chicago Fatal Porch Collapse of 2003 were 13 people died and 57 more were injured that took ten years to litigate...I can't find enough facts from articles online to really know how the owner was only out $660,000 when it doesn't appear to be in any kind of corporate structure that provides liability protection, and he owned 20-30 other buildings at the time....it appears he simply had a boatload of umbrella insurance but I can't tell anything for sure. Maybe someday when I get some free time I'll figure it out...
I can explain how we do our research which may answer your question;
In order to find a case, an attorney must query one of a number of different legal research vendors. Common among those vendors are; Fastcase, Westlaw, Lexisnexis, etc. Each service costs us money to use. Some vendors do monthly fees, but most do a cost per search. For us to find relevant case law for a case, we need to do some kind of boolean search like;
"Negligence" AND "cause of action" w/30 "collapse"
A search like that is likely to turn up about 30 cases in the average jurisdiction. Each time we click on a case name, it costs us additional money. So if we wanted to read those 30 cases to determine which one is more appropriate for your case, we would need to incur significant charges.
Alternatively, we can easily find a very specific case if we have it's citation; something like 100 F. Supp. 2d 1073. (I have no idea what that would pull up, but I bet it is something cool.) Anyway, that alone would cost us money to pull up that specific case.
If we wanted to see if that case was still good, we would click on the function offered by the legal search engine; whether Westlaw or Lexis. This process, called shepardizing, also costs money.
So you see, legal research fees add up fast, and pulling up case law for every little online free legal advice question is going to bankrupt a law firm.
@Matthew Kreitzer I get that if you were looking for case law on something new. If I go to a lawyer who specializes in divorces, or some other area of law totally unrelated, and ask them about LLC piercing the corp veil case law, I expect they are going to have to do all that research and incur a bunch of charges from Lexis.
I don't expect that a lawyer who has actually worked piercing the corporate veil cases is going to have to go to Lexis and pull up their own piercing the corporate veil cases they already have, or other piercing the corporate veil cases they referenced and looked up in the past in preparation for their own cases. If they told me there would be all kinds of research involved...I would doubt they were an expert in that area.
oh my god, this post is absurd. As an attorney in New York I would kindly suggest to everyone here who had questions that require legal advice to go get answers to them. ..by an attorney that is in the state you are doing business in, who practices in that state and who also invests in that state. Whatever the meeting coats you would likely result in answers to your questions that actually pertain to your business, and hopefully develops a relationship with a legal advisor you can trust to further your business.
@Matthew Kreitzer I get that if you were looking for case law on something new. If I go to a lawyer who specializes in divorces, or some other area of law totally unrelated, and ask them about LLC piercing the corp veil case law, I expect they are going to have to do all that research and incur a bunch of charges from Lexis.
I don't expect that a lawyer who has actually worked piercing the corporate veil cases is going to have to go to Lexis and pull up their own piercing the corporate veil cases they already have, or other piercing the corporate veil cases they referenced and looked up in the past in preparation for their own cases. If they told me there would be all kinds of research involved...I would doubt they were an expert in that area.
Which is not the case. Even attorneys who are experts in their field cannot keep up with the sheer number of these cases that go through the Court system. There are dozens, if not hundreds, of new cases for our consideration that make their way up through the court system each month. This is one of those "how the sausage is made" things that attorneys don't tell clients about. There are far too many cases for us to keep abreast of to be able to spout off a single, controlling case for every single client that comes in; especially since a single fact can skew the entire analysis. If you come across an attorney that can come up with a case directly on point to your particular case off the top of their head, I would not trust that attorney.
Is it recommended that a separate LLC be created for each investment property, or is it fine to bundle a few together?
Either works. Remember that LLCs didn't even exist before 1977, and real estate investing did just fine.
A benefit of separating each investment property into its own LLC allows for a catastrophe to happen on one of your properties (Property "A"), and it not affect your others (Property "B", "C", etc.) and only the assets in LLC "A" would be at risk.
The challenge is that this can get expensive and be cause for a lot of paperwork (I think you mentioned wanting "hundreds" of properties?). I think the main considerations are: (1) value - is each house is worth 70K or more like 500K? The more the value of the asset, the more you might want to lean on separating out into different LLCs. (2) Tax advantages [consult a tax person for specifics] - If you own a depreciating asset (a structure/house/building, for example) in your LLC mixed with a non-depreciating asset (raw land, for example) it might be easier to segregate those types of assets for tax purposes. (3) Cost. If you live in California (which I think you do) having $800 a year (minimum) for each LLC/property can get expensive very quickly. Most Californians I know do NOT have an LLC for each property, simply because of the cost. They offset risk in other ways (insurance, more strict tenant application process, etc.)...
If you do plan on having hundreds of properties, another option is to create one main company and have it file multiple fictitious business name registrations (DBAs). With this approach, each business can have the right name and branding for their specific market, while still enjoying the legal protection of the main holding company. When it's time to file your taxes, you can take the income earned from each DBA and report them in a single tax filing under the main LLC or corporation. Of course, situations vary and you should always consult with an attorney or tax advisor for individual advice regarding your particular situation.
Also, should the LLC be established in the state that the property is in? If so (or if not), why?
If you are doing business in California, you should probably have a California Corp (S, C, LLP, LLC, etc). All the investors and business people I work with tell me California hunts down businesses that incorporate out of state to mask doing work in state. Other states also have others rules (I don't know all the rules). Again, I yield to the attorney in the state you plan on doing business.
I hope that helps!
Zap Martin, MBA
Where are @Scott Smith answers?
Where are @Scott Smith answers?
After a little looking I found a book on amazon citing case law specific to corporate veil piercing. Its published in 2013, called, "Piercing the Corporate Veil" by Landmark Publications, Landmark has 335 publications written for law professionals and law students. The book contains 136 cases where they discuss if it is appropriate to pierce the corporate veil and why. It costs $3.99
Hopefully when I read it I am not practicing the unauthorized practice of law on myself...
After a little looking I found a book on amazon citing case law specific to corporate veil piercing. Its published in 2013, called, "Piercing the Corporate Veil" by Landmark Publications, Landmark has 335 publications written for law professionals and law students. The book contains 136 cases where they discuss if it is appropriate to pierce the corporate veil and why. It costs $3.99
Hopefully when I read it I am not practicing the unauthorized practice of law on myself...
No, not particularly. General rule of thumb though; cases from 2013 are unlikely to be controlling in a court of law, and only those cases that are from your own state have any kind of persuasive authority in the particular state you are dealing with. For instance; a case from Colorado Circuit Court has zero bearing on a Virginia Circuit Court case. I hope you find it educational though.
LLC questions: I'm not an attorney myself but an ex financial planner and owned 6 businesses myself in 2 Countries and registered in 5 different States. So I know a lot by own experience. Fortunately never had a law suit, so cannot tell how solid those get when tested and probably those who get law suit will never share their experience. So the best is to rely on a GOOD attorney... but we never know how good they are until they are tested... always the problem, same with accountants...
Definitely need a LLC or S-Corp in most cases, or maybe a series LLC if you have hundreds of properties.
Usually don't put your active and short term income in a LLC, but in your S-corp. Rentals are great in LLC. And you probably need both anyway... don't want to put everything in same company, maybe a few houses is ok but not all, just in case.
Corporate veil is really important to respect to keep your protection and liability against law suits... maybe even land trust is awesome.
Consult an attorney that is for sure and I know 2 who are specialized into that if you need to.
Good luck
Scott, I'm part of a neighborhood group that has formed an LLC to rehab homes in our neighborhood. We weren't looking to cap the number of investors, but have been told having more than 10 people invest could violate SEC security laws. Can you provide some guidance on whether this is the case? Trying to understand the best way to proceed. Thanks in advance.
Hi everyone,
Thanks for all the questions here. I will be composing a comprehensive FAQ using this information that I will be sharing with the community. The responses necessitate much more than a pithy few sentences to answer.
Hi everyone,
Thanks for all the questions here. I will be composing a comprehensive FAQ using this information that I will be sharing with the community. The responses necessitate much more than a pithy few sentences to answer.
Did you post your Q&A's ?