When you hold a property in a LLC, does it release your private liability for everything?
Also when you don't pay your note?
Also when you mismanage your LLC?
Where can I verify this information?
Thank you so much for your help!
Ofcourse I am not planning on doing all this, but I want to check this first.
Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
15y
It won't release the owners from any personal negligence. If the note is in the business name solely, you have no liability, though very few lenders are going to lend to a business without a personal guarantee. Also, if you mismanage your LLc (depending on exactly what you mean), you probably won't be protected.
Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
15y
It won't release the owners from any personal negligence. If the note is in the business name solely, you have no liability, though very few lenders are going to lend to a business without a personal guarantee. Also, if you mismanage your LLc (depending on exactly what you mean), you probably won't be protected.
Thanks Scott,
So the lender will decide whether or not you will be personal liable for the mortgage?
And mismanagement I do not mean frauding, but making the wrong decisions.
I would like to know how wrong things can get for me personal, worst case scenario.
I've heared about investors stepping out of a deal when they turned bad and I really would like to know what my 'outs' are before I step into the deal.
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
15y
Jason is right on but just to add, how you conduct the business will determine your liability as well, doing something stupid will likely be covered, grossly negligent might get you hung, especially with other members of the LLC. If you are the only member, your conduct will have alot to do with what you may be liable for with the public. Insurance is a good idea, but it will not cover intentional acts or illegal activities.
So if I get you right:
if I am the only owner of an LLC,
if I do my best but can make (big) mistakes,
if I have a good insurance
if I can get the bank to lend me without a personel guarantee,
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
15y
There is always risk, so do your best.
Don't worry about a bank loaning you money without a personal guarantee, because it won't happen, at least not untilyour company can prove sufficient income, have more collateral than would be required, have good credit and have assets that far exceeds the risk to the lender....but even then, more than likely, it still won't happen.
Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
15y
No such thing as totally safe. That said, an LLC liability is ONLY "inside" liability protection, not outside. In other words, if your LLC owns a property, and you drive drunk and kill someone, You and ALL your assets, including your LLC, will be sued.
Inside liabilty refers to protection inside the entity. In other words, if your tenant falls and brakes their neck in your rental, they can only sue yoru insurance and the LLC, not you personally or your other persoanl assets, UNLESS . . .
Your corporate veil is pierced and there are many ways this can be done. If you act negligent (if the tenant informs you that the front step is broken, you do nothing, they inform you again in writing, you do nothing, then grandma visits and dies on the front step from tripping, you will be held negligent and therefore responsible so you and ALL your persoanl assets will be at risk. You can also improperly run your business such as not keeping seperate bank account for your entity, or not keeping up with the entity paperwork and filings, and many other ways.
Speak with a legitimate attorney familiar with entity structuring and legal issues of entities.
Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
15y
As Bill said, you're not going to find a bank that will loan to you these days in a new business entity without a personal guarantee. But, assuming you manage the business entity correctly, run the company as a business, and don't do anything personally negligent, you're probably pretty protected. You can still get sued personally (anyone can sue anyone for anything), but you'll likely be protected given the assumptions above.
And yes, you should have general liability insurance as well to help protect against business losses...
Investor · Pawleys Island, SC · Member since 2008 · 1k+ posts · 837 votes
15y
Originally posted by Will Barnard:
Inside liabilty refers to protection inside the entity. In other words, if your tenant falls and brakes their neck in your rental, they can only sue yoru insurance and the LLC, not you personally or your other persoanl assets, UNLESS . . .
Just to piggyback on Will's response.
There is more to add to the UNLESS
You said that your LLC is a single member LLC and you implied that you will also manage the LLC and the rental property that the LLC owns.
Now, here is where you need to have a serious discussion with your attorney.
When you personally manage the property, and a tenant's personal injury is a result of something you personally did, or something you should have done but failed to do, then you are personally liable. Your LLC's asset protection just evaporated.
Both you and the LLC will be named as co-defendents and your personal assets are exposed.
Real Estate Attorney · Charlotte, NC · Member since 2008 · 54 posts · 3 votes
15y
As a former litigation attorney... I would sue you and your llc. I would try and show that your LLC was a mere instrumentality of you.... and if I did, I got you and your LLC.
An LLC and Corporation are nothing more than a mere hurdle. If you are relying on an LLC make sure you sign your name like a member and or manager of the LLC, make sure you have a tax id number, make sure you have an operating agreement, and your yearly filings... In short, here is the way the court looks at it: if it walks like a duck, quacks like a duck, its a duck...
so act like a duck!
Select a State · Member since 2011 · 90 posts · 3 votes
15y
Hi,
I will also piggyback since I have a related question.
Since many recommend having both an LLC and liability insurance, can the insurance be used to protect your assets within the LLC from potential lawsuits, meaning the SFH's within the LLC? So as long as I have insurance I can protect my assets wtihin the LLC from a possible lawsuit.
What if I just ensure my tenants have liability insurance to? Would this provide some protection?
SFR Investor · Orange County, CA · Member since 2009 · 1k+ posts · 1k+ votes
15y
Originally posted by Jaime Kosofsky:
In short, here is the way the court looks at it: if it walks like a duck, quacks like a duck, its a duck...!
Thanks for the input Jaime. I've come to believe that if you legally and sincerely treat your LLC or corporation like a separate entity, so will the court.
Investor · Pawleys Island, SC · Member since 2008 · 1k+ posts · 837 votes
15y
Peter,
An LLC is not a substitute for liability insurance. If the LLC is successfully sued, all the LLC's assets are at risk. It is the insurance policy with adequate liability coverage that pays the judgment awarded to the plaintiff so your LLC does not have to forfeit its assets.
The hazard insurance policy you purchase for your rental property will only replace the dwelling structure in the event of a total loss. If your tenant's personal property is also destroyed along with the dwelling structure, then the renter's insurance your tenant purchased will cover your tenant's loss.
Accountant · Member since 2011 · 11 posts · 3 votes
15y
Unfortunately, what you believe has nothing to do with what courts will decide.
Several recent court decisions have found (Olmstead, Modanlo, Albright, Cognex) that assets of a single member LLC are available to satisfy personal creditors of the single member.
The entire "outside protection" benefit of the LLC is that creditors of the member cannot gain control of LLC assets. They are limited to charging orders only.
Courts have found that the charging order protection was intended to protect other members' interests in the event that any one member was subject to a lawsuit, bankruptcy or other event that would threaten their membership interest. In a single-member entity, there are no non-debtor members to protect. The charging order limitation serves no purpose in a single member limited liability company, because there are no other parties' interests affected.
So LLC assets are available to satisfy personal creditors. I would also expect this to apply to 2-member LLC's where the members are husband/wife. I would also expect this to eventually extend to single owner S-corps as well.
So, if you are acting as owner, landlord, property manager or otherwise exposing yourself to outside liability, a single member LLC provides little no asset protection.
SFR Investor · Orange County, CA · Member since 2009 · 1k+ posts · 1k+ votes
15y
Originally posted by Mark Wagner:
So LLC assets are available to satisfy personal creditors.
I agree, but we're not talking about using an LLC to protect assets from personal liability. The units of an LLC, like stock certificates, are just another personal asset to be attached.
The purpose of the LLC is to separate the assets of the business from the personal assets of the member. The LLC protects the member from the business. The member needs liability insurance to protect the business from himself.
Accountant · Member since 2011 · 11 posts · 3 votes
15y
That's exactly my point. Courts have ruled that for a single-member LLC, LLC assets and personal assets are the same.
It would seem naive to think that a court would allow LLC assets to satisfy a personal creditor and not use a member's assets to satisfy an LLC creditor.
Best bet is to not operate in a single-member LLC.
Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
15y
Originally posted by Mitch Kronowit:
The purpose of the LLC is to separate the assets of the business from the personal assets of the member. The LLC protects the member from the business. The member needs liability insurance to protect the business from himself.
Mitch -
As many time as this topic comes up on BP and as many times as I try to express this sentiment, it never comes out nearly as well as you just summarized it in three sentences.
SFR Investor · Orange County, CA · Member since 2009 · 1k+ posts · 1k+ votes
15y
Originally posted by Mark Wagner:
Courts have ruled that for a single-member LLC, LLC assets and personal assets are the same.
No, they have not. What courts have ruled, namely in the cases such as Olmstead and Albright, is that simply moving assets into an LLC, especially one that doesn't serve ANY business purpose, does NOT protect them from personal liability - or what is termed a "top down creditor". While the LLC may technically own the assets, the member technically owns the LLC, so the assets can be attached.
It simply does NOT apply the other way around. Liabilities that occur within an LLC (single-member or multi) are limited to the assets of the LLC and NOT the personal assets of the member(s). This is termed a "bottom up creditor". Find me one attorney that disagrees.
Doesn't matter what it seems like, the courts have ruled that single-member LLC's are legal entities. That is probably one reason several states, such as California, held off on allowing SMLLC's to be formed, i.e., they were waiting for precedent.
Accountant · Member since 2011 · 11 posts · 3 votes
15y
Not quite. Olmstead found that a judgment creditor may levy on a membership interest under the general execution statute (Fla. Stat. 56.061) and obtain full title to the interest, including the full rights of membership.
Now the personal creditor can seize the LLC itself and therefore its assets. There is no longer a distinction between personal and SMLLC assets.
"Business purpose" of the LLC was not a factor in anything I've read.
The concept of liabilities that occur inside the LLC is as you say. But the way that most individuals operate with an LLC is that the member personally acts on behalf of the LLC (property manager, signing leases & contracts, making repairs, etc). The problem this creates is that the member can PERSONALLY be sued for PERSONAL actions, even if the property is owned by the LLC. Therefore, the manner in which most real estate LLC's are operated do not provide inside protection, either.
As operated by most investors, SMLLC's do not provide the asset proection they think it does. From inside or outside liability. I stand by this statement.
Not unless you have a management co.
I guess you could wait around for the various states to fiddle with their LLC statutes.
The best bet is still to not operate in a SMLLC. Have a >10% co-member so that you know charging order protection will be valid.