Purpose of an LLC on multi-family

19 Replies

Hey Everyone, 

I have a pretty general question about LLC's. I've read several articles weighing the pro's and con's but I'd love to see BP members thoughts on these questions.

I've been advised to open an LLC for each property. (I'm currently a couple of weeks from closing on our first multi-family.) I understand the reason one would need an LLC in each property, otherwise you're not limiting your liability.. From what I've read - I'm pretty certain that is the route I want to go.

My question is - what exactly is the purpose of the LLC? The loan is in my name (and I've been told that since it isn't a commercial loan, it'll be best to stay that way,) and the deed is going to be in my wife and I's name. The only thing the LLC would actually be named on, is the lease agreements, and the bank account, correct? Is that still going to be serving the same purpose of protecting us individually? 

Which leads to my next and final question - Do we need to create our new bank account (for the investment property) in the name of the LLC?

Of course I'm not completely ignorant to these questions and I have an idea.. but if someone with a little more experience could chime in, I'd really appreciate any insight. 

@Jacob Murry The purpose behind an LLC is to limit your liability. And to a certain extent it will do that. If someone falls off the building and is crippled for life you will get sued whether you have an LLC or not. So carry lots of liability insurance regardless. My lawyer said don't have more than three assets in an LLC and don't mix sizes of assets (values) in the same LLC. Yes, open a bank account in the LLC name, get credit cards for the LLC and conduct all business through the LLC; never mix your personal stuff with the LLC stuff. I have an LLC for an apartment building but have concluded that the LLC concept is more of a fashion statement than the protection it was marketed as offering. Nothing beats liability insurance in the event of a seroius happening.

An LLC is just another form of insurance. If the title will be in you and your wife's name, the LLC will do nothing to protect your personal assets if you lose a judgement worth more than the property and any liability insurance you have. This would rarely happen if you have the proper insurance. The case you are illustrating is basically having a property management LLC. It would have no assets so if the LLC got sued and lost there is nothing to collect. If you use a bank account in your name, even if you solely use it for rentals a good lawyer could argue it is piercing the veil. The bank account must be a business account in the company name.

I just moved my assets into LLCs and it was a huge pain in the @ss and honestly I don't know if it was worth it. But I used an asset protection lawyer to get it all set up, not legal zoom. From the comments you made, I would absolutely not recommend getting an LLC because it would not protect you in any way. Waste of time and money.

+1 to Thomas S

The LLC is a waste of time if you,

... do your own repairs

... show the place

... manage it

... mingle funds

In fact, a LLC is a personal asset you own, you have a personal interest in the LLC. A judgment against you will take that asset or force you to sell it.

Get Landlord Insurance and a good Umbrella. LLCs are overrated. Attorneys love it, as you will see.  

For some privacy and business identity, use a DBA. You can open bank accounts with DBAs.

Frank

Originally posted by @Frank S. :

+1 to Thomas S

The LLC is a waste of time if you,

... do your own repairs

... show the place

... manage it

... mingle funds

In fact, a LLC is a personal asset you own, you have a personal interest in the LLC. A judgment against you will take that asset or force you to sell it.

Get Landlord Insurance and a good Umbrella. LLCs are overrated. Attorneys love it, as you will see.  

For some privacy and business identity, use a DBA. You can open bank accounts with DBAs.

Frank

I disagree, at least in TX. (Although I *do* agree about commingling business and personal funds.) 

A judgment against you personally will only create a charging order against a TX LLC and TX charging orders can't be foreclosed by the creditor. You can also make it (via proper formation) that the creditor gets stuck with phantom income but no distributions creating the chance for a pennies-on-the-dollar settlement. TX also doesn't allow a plaintiff to sue both the LLC and the LLC members in the same lawsuit.

DBAs do little for privacy as the *point* of the DBA is to make public who is operating under the assumed name. They might deter an unsavvy tenant's small claims lawsuit, but it won't deter a plaintiff's lawyer. If you want better (read as useful) anonymity, you can form a trust to own the LLC, and then use a DBA. Trust for anonymity, LLC for liability shield, and DBA to obfuscate the name.

Yes, insurance is necessary, but you better believe an insurance company will try and find any reason it can to deny a claim if you ever have a large claim. Insurance companies make their money by paying the least amount of money at the latest time. Umbrellas sometimes won't cover a claim unless the primary insurance covers the claim. Sometime, you should read your policy in full, noting precisely what is and isn't covered. It may surprise you. Large insurance policies also can (perversely) *attract* lawsuits, since the plaintiff lawyer knows he'll have someone to pay out a claim if he wins. You might also be surprised to know that your coverage amounts are often fairly easily discovered by a savvy plaintiff lawyer before you even get a demand letter. \

The correct choice is usually *both* a limited liability entity as well as adequate insurance.

Originally posted by @James Miller : If you want better (read as useful) anonymity, you can form a trust to own the LLC, and then use a DBA. Trust for anonymity, LLC for liability shield, and DBA to obfuscate the name. 

Thank you for an informative post, James.

If I could ask for clarity regarding trusts and anonymity. As I search ownership records in my area, trusts are always deeded as John Smith, Trustee of the John, Jill, Jack...Smith (revocable or not) Trust.   I haven't seen an anonymous trust yet.  Can you name them whatever you want? 

If I were to go all AP, I just picture it looking this way: 123 Main St LLC, Trustee of the 'insert your own name here' trust. Trusts offer no liability protection plus I'm having a hard time seeing the anonymity. Thanks for any clarification!

In my personal experience, the "proper formation" was too costly and too cumbersome for a small fish like me. Good insurance is sufficient for us as described above. I couldn't find a good argument to go through all that trouble. I'm open to suggestions. Either way, I'm sure I would mess up the LLC machine somehow.

The privacy mentioned, as related to the DBA, was not done to deter claims. Joe Doe gets a check from my DBA . I receive checks under the DBA. Advertising is done under DBA. That's simple, clean, and we paid "pizza and beer money" ($65).

"Umbrellas sometimes won't cover a claim unless the primary insurance covers the claim". 

That's how secondary issurance works. Do they ever pay if the primary doesn't cover a claim?  

OP. Read about tort and LLCs.

Umbrellas are ridiculously cheap, maybe because they litigate to death to avoid payments.  $200 gets you a million, $275 may get you 3 million. 

OP. Good luck with your research.  The above is a summary of my limited knowledge on the topic.  My places are safe,  clean,  well-maintained, and I can sleep "OK" at night. 

NOLO has great books.

Frank

Originally posted by @Frank S. :

"Umbrellas sometimes won't cover a claim unless the primary insurance covers the claim". 

That's how secondary issurance works. Do they ever pay if the primary doesn't cover a claim?  

 Not in my experience. The point I was trying to make is that your primary insurance will exclude from coverage a lot of things you likely think are covered. And if your primary excludes it, so does your umbrella.

Holding a property in an LLC really doesn't do much good or offer any substantial protections or benefits unless you also have a fully comprehensive estate planning strategy that incorporates your entire financial life and all your assets / business / debts / etc.... Estate planning can be expensive, but if done properly it is worth the money and effort.

There are definitely benefits of using the LLC - but simply vesting the title to your LLC is not going to stop somebody from coming after you personally.

Originally posted by @Blair Poelman :

Holding a property in an LLC really doesn't do much good or offer any substantial protections or benefits unless you also have a fully comprehensive estate planning strategy that incorporates your entire financial life and all your assets / business / debts / etc.... Estate planning can be expensive, but if done properly it is worth the money and effort.

There are definitely benefits of using the LLC - but simply vesting the title to your LLC is not going to stop somebody from coming after you personally.

Yes and no. Texas’ charging order protection is pretty strong even without estate planning.

@Jacob Murry If you have doubts and question the LLC is only going to provide more benefit and security it will not Harm you id rather be safe than sorry if I were you. I would not purchase a property at all under my own name and don’t advise it
Originally posted by @Gail Govednik :
@Jacob Murry

If you have doubts and question the LLC is only going to provide more benefit and security it will not Harm you id rather be safe than sorry if I were you. I would not purchase a property at all under my own name and don't advise it

I like to think of an LLC as a one-time large insurance premium with small premiums in following years. The state has allowed you to pay a tax to get government sanctioned liability protection. In TX at least, we don't have an annual maintenance fee; and if taxed as disregarded, your yearly tax preparation would be practically the same as if you didn't do the LLC.

Though I don't disagree with any particular legal point @James Miller made, my perspective is slightly different.  

Yep, your first line of defense is always going to be insurance, however you arrange that (property, umbrella, excess-lines, etc.).  

James seems to have more experience in dealing with charging orders than I do, though I've put both the LLC and the member on the same suit but that's more specific to the facts of my cases. It's up to the defending attorney to argue against the propriety.

As for an LLC for each property, this is a point that everyone has multiple opinions. My preference for clients will depend on their situation. I tend to divide this by character of the income, parties involved, and nature of the risk, as well as the client's apatite for risk.

Assuming a catastrophic loss that burns through all the insurance resulting in a large outstanding liability, the assets of the entity will be liquidated to satisfy a judgment. One-company-per-property will certainly shelter other assets, but is burdensome. Keep as many in a company as you feel comfortable putting at risk. Many do one large asset (apartment complex) in one entity, and many small assets (SFR) in another.

Flipper income is taxed at dealer rates.  Rental income is taxed at much lower rates.  If you are good at working with classes in your accounting software, you might be able to avoid using different entities, but it may be easier to split income by entity.

"Partnering" (a dangerous word, btw) with people can be done with a stand-alone entity. A JV for short-term utility; a special-purpose entity for longer-term projects (multi-year).

Rehabbing is a dangerous activity.  Electricity, chemicals, scaffolding, spinning blades, etc.  Whereas leasing space is not so much a danger.  

Sure, lots of lawyers don't realize that BOC 101.113 exists. In my experience I usually bring it up in my first response to a demand pre-suit and threaten sanctions if suit is filed against both LLC and member; the resulting lawsuit typically only names the LLC.