More protection than an LLC ???
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Lender · Tyngsboro, MA · Member since 2009 · 3k+ posts · 2k+ votes
14yOriginally posted by Joe Bertolino:
Originally posted by Curt Davis:
You dont even need to have them in an LLC, you just need a good umbrella insurance policy. Some people go to the extreme to have a separate LLC for each property. Have fun paying the LLC yearly renewal fees and see what a drain on cash flow that is!!
I usually only see separate LLC's when different investors are involved with each property. The best bang for the buck is a single LLC and the highest umbrella limit you can afford. The $800 per year it costs to maintain one separate LLC will buy a $3-5m umbrella.
John M., the comments above will also be dependent on the cost of an LLC in Virginia.
In Ca, where Joe Bertolino is, LLC's are $800 to register plus $800 per year. But they may not be that much in VA. For example, in NH they are only $100, so are a bargain.
You also mentioned having a Nevada LLC or something similar. I have never heard yet where that is helpful, because you still will have to register your LLC as a foreign company in the state where you are buying property, thus incurring double fees every year: 1 set in Nevada, and then the fee in VA.
26 Replies
- Investor · Pawleys Island, SC · Member since 2008 · 1k+ posts · 837 votes14y
What kind of lawsuit are you worried about? If the lawsuit is from a tenant, you are going to get sued whether there is an LLC in place or not. The LLC does nothing to protect you from a tenant lawsuit. If you are managing the property yourself, the LLC does nothing to shield you personally from exposure in the event of a tenant lawsuit.
Whether you have the LLC or not, you still need liability insurance. With insurance, the insurance company will defend you in the event of a lawsuit. Without insurance, you will have to pay for your own defense.
Consult you own attorney for specific details.
- 14yDon KonipolBusiness MemberInvestor · The Woodlands TX / Avon, CT · Member since 2009 · 6k+ posts · 10k+ votes
The more layers of asset protection, the more cumbersome and expensive to operate. The consensus seems to be that an LLC with insurance in place on rental property offers the optimal amount of protection vs cost factor. People worried about outside liability would have to utilize additional layers of protection.
- 14yCurt DavisBusiness MemberFlipper/Rehabber · Memphis, TN · Member since 2008 · 5k+ posts · 2k+ votes
You dont even need to have them in an LLC, you just need a good umbrella insurance policy. Some people go to the extreme to have a separate LLC for each property. Have fun paying the LLC yearly renewal fees and see what a drain on cash flow that is!!
Curt Davis - KAIZEN Realty538 Reviews - Landlord · Seattle, WA · Member since 2010 · 3k+ posts · 1k+ votes14y
I'm with Dave T. The first thing you want to do is determine what you are trying to protect yourself from.
There are many kinds of liabilities and insurance can handle many of them, but not all. Some examples:
Acts of God, Terrorism, earthquake, accidents, flooding, fire, condemnation, tenant damage, power failure, theft and exposure because you have deep pockets. I'm sure this isn't a comprehensive list.
An LLC is primarily used to put a firewall up to protect your personal assets.
Insurance can be purchased to cover many different liabilities, but has its limits.
A land trust can be used to limit your exposure to vultures looking for anyone with deep pockets.
You may want to consult with an attorney that specializes in asset protection to learn more of your options.
- Real Estate Investor · Fenton, MI · Member since 2008 · 946 posts · 153 votes14y
So do any of you even recommend having an LLC? What about just staying a sole proprietor?
- Investor · Peachtree Corners, GA · Member since 2012 · 131 posts · 83 votes14y
Yes, Steve. Put them in a LLC or S corp. You NEVER hold rental property in your name. Obviously have insurance on each property and then buy an umbrella policy.
- Investor · El Dorado Hills, CA · Member since 2012 · 1k+ posts · 1k+ votes14y
Originally posted by Curt Davis:
You dont even need to have them in an LLC, you just need a good umbrella insurance policy. Some people go to the extreme to have a separate LLC for each property. Have fun paying the LLC yearly renewal fees and see what a drain on cash flow that is!!I usually only see separate LLC's when different investors are involved with each property. The best bang for the buck is a single LLC and the highest umbrella limit you can afford. The $800 per year it costs to maintain one separate LLC will buy a $3-5m umbrella.
Applicants attorneys take the path of least resistance and from what I have seen if your liability limits are high... they rarely bother trying to go after personal assets. Their option is to take down your $3-5M umbrella quickly and easily while collecting their seven figure fee or fighting tooth and nail for years chasing your personal assets... they would rather have a million in fees right now than $1.m in 3/4/5 years and hundreds of manhours from now.
- Landlord · Seattle, WA · Member since 2010 · 3k+ posts · 1k+ votes14y
Another reason for separate LLC's is when you start to have a significant amount of assets.
For me having say 10 - 200K properties in one LLC would probably not be a good idea. Having 1 - 30K property in 10 LLCs doesn't making much sense either.
If I have 30 unit apartment I would probably create a single LLC for it.
- Lender · Tyngsboro, MA · Member since 2009 · 3k+ posts · 2k+ votes14y
Originally posted by Joe Bertolino:
Originally posted by Curt Davis:
You dont even need to have them in an LLC, you just need a good umbrella insurance policy. Some people go to the extreme to have a separate LLC for each property. Have fun paying the LLC yearly renewal fees and see what a drain on cash flow that is!!I usually only see separate LLC's when different investors are involved with each property. The best bang for the buck is a single LLC and the highest umbrella limit you can afford. The $800 per year it costs to maintain one separate LLC will buy a $3-5m umbrella.
John M., the comments above will also be dependent on the cost of an LLC in Virginia.
In Ca, where Joe Bertolino is, LLC's are $800 to register plus $800 per year. But they may not be that much in VA. For example, in NH they are only $100, so are a bargain.
You also mentioned having a Nevada LLC or something similar. I have never heard yet where that is helpful, because you still will have to register your LLC as a foreign company in the state where you are buying property, thus incurring double fees every year: 1 set in Nevada, and then the fee in VA.
- Specialist · Cleveland, OH · Member since 2011 · 1k+ posts · 852 votes14y
Have a large 1st mortgage, even if it is private from another company. Anyone that sues and gets a judgement, they gotta pay off the first to take the house. Best protection ever.
- Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes14y
I held properties for years individually prior to the 90s when the LLC became available as a business entity. Good management + insurance goes along way in keeping you out of trouble, I never was sued by a tenant or due to a rental held. IMO, today, an llc and insurance with decent properties and paying attention should be more than enough. These schemes seem to be nothing but ploys to sell you something based on paranioa...
- Lender · Tyngsboro, MA · Member since 2009 · 3k+ posts · 2k+ votes14y
Well, ideally, Bill Gulley, that should be the case. But there is a certain underlying assumption in the above that people are acting rationally. I agree with you, that should be enough, and that in most cases it is.
There are always the odd cases here and there, (the MacDonald's hot coffee case for example) where rationality and reality seem to take a leave of absense
- Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes14y
Yes Ann, and McDonnalds is a slightly larger target for attornies to aim at, esecially on a contingency basis. The run of the mill landlord with a few properties, renting to those who have limited resources who follow my advice should be safe enough. It also depends on the area you live in, the attitudes of the courts and the perpensity to bring actions, especially trivial ones. Those big cases fuel the paranoia and fuel the guru schemes.
IMO, and it can be seen in the premium structure for insurance, there are many other business ventures that carry much higher liability issues than landlording. Lender's liability is much greater, an electrician or even a lawn care company has greater exposure than landlording a single family dwelling. Negligence is not that hard to avoid as a landlord, meeting the code requirements, taking care of safety issues and good management will go along way to protect you.
If you are not negligent or don't do anything intentionally there aren't that many ambulance chaser types that are going to target someone who is seen to have limited resources, especially when the tenant client has less to pay costs of any suit.
Then, there is your ability to fend off initial threats by a tenant, I draw my sabre pretty quickly and aggressively defend any claim in a direct manner letting any claimant know they'll be on the losing end. I was better informed on tenant issues than any of my tenants ever were and made sure they knew it. Being fair with them and not just ticking someone off also helped. Just good, fair management.
Document inspections by third parties, inspectors and keep properties in good shape and you will not be negligent. If a plane crashes on your property that's not on you....
- Hatfield, PA · Member since 2012 · 1k+ posts · 629 votes14y
I have several reasons for not using an LLC in most properties. It makes a bear to get financing. And some states without income tax will hit an LLC owner with business and franchise taxes, perhaps 7% or higher. That will buy a lot of extra insurance. And of course, filing a separate tax return in addition to personal.
- SFR Investor · Orange County, CA · Member since 2009 · 1k+ posts · 1k+ votes14y
Originally posted by Dave T:
What kind of lawsuit are you worried about? If the lawsuit is from a tenant, you are going to get sued whether there is an LLC in place or not. The LLC does nothing to protect you from a tenant lawsuit. If you are managing the property yourself, the LLC does nothing to shield you personally from exposure in the event of a tenant lawsuit.Whether you have the LLC or not, you still need liability insurance. With insurance, the insurance company will defend you in the event of a lawsuit. Without insurance, you will have to pay for your own defense.
Consult you own attorney for specific details.
We've discussed this several times in the past and the only thing I agree with you on is getting liability insurance and consulting your own attorney. The latter I have done and they don't agree with your views on LLC's at all. If what you say is true, LLC's would be pretty much useless and discredited instead of recognized in all 50 states.
A property manager does NOT shield the OWNER of the property. Just try going into court saying it's all your property manager's fault and see how far that gets you.
John, speak with a reputable business attorney about forming an entity for your rental properties. They will separate the facts from the myths. Just because several bozos formed and misused their LLC's and corporations doesn't mean these entities are without merit. Forget all the hype about Nevada and Wyoming LLC's. Form your LLC where you do business.
And the only trusts that offer real asset protection are irrevocable trusts (or variations of them). But that's a complex topic best discussed with an attorney.
- Investor · Pawleys Island, SC · Member since 2008 · 1k+ posts · 837 votes14y
Originally posted by Mitch Kronowit:
We've discussed this several times in the past and the only thing I agree with you on is getting liability insurance and consulting your own attorney. The latter I have done and they don't agree with your views on LLC's at all. If what you say is true, LLC's would be pretty much useless and discredited instead of recognized in all 50 states.
A property manager does NOT shield the OWNER of the property. Just try going into court saying it's all your property manager's fault and see how far that gets you.
Mitch,
Don't read more into my comments than I actually wrote. All I am saying is that if you are personally managing your own property property, then you are personally liable for your actions. In the event of a tenant lawsuit, you are personally exposed for the repair you screwed up, or whatever you did not do but should have. The LLC does nothing to shield you personally when you self-manage.
Whether a professional property manager deflects any of the liability is a completely different discussion but not part of my message.
- Mechanicsburg, PA · Member since 2013 · 3k+ posts · 2k+ votes13y
John M.
Dave T is right, as he almost always is.
LLCs have been oversold by gurus and other many of whom make money by selling more LLCs. I know several "real estate investors" who have multiple LLC, but don't own any real estate. Seems to me to be the cart before the horse.
Trusts offer anonymity, but no asset protections.
LLCs initiated in states that you don't do business, doesn't make a lot of sense if you have to register and pay fees as a "foreign entity" in the state that you actually do business. If somebody slips and falls on your property in Iowa, that's owned by a Delaware LLC, trust me they will be suing you in Iowa.
Piercing the corporate veil is a lot easier than most people realize. Don't keep corporate minutes. Have a single member LLC. Don't have a separate bank accounts. Are you under capitalized. Do you co-mingle funds.
I've heard people recommend a separate LLC for each property. good luck if you have 100 properties and are in CA, where the state fee is $800 a year for each LLC and you'd have to file 100 separate income tax returns for each LLC, with 100 separate bank accounts all adequately funded. That looks like a full time job just managing the LLCs.
- Rental Property Investor · Upstate, NY · Member since 2012 · 3k+ posts · 3k+ votes13y
I use an LLC & high liability Insurance but the wake up call was a local landlord being sued for lead paint.
Properties all in LLC's with high liability insurance, had the place checked 3x for lead etc etc. Lead inspection guys not liable.
He told us his legal fees are currently $56,000 & he was just going to trial last month the plaintiff was going for $8mill. We don't yet know the outcome.
This maybe a unique circumstance but how do you protect yourself from the above REAL LIFE scenario????? - Investor · Mission Viejo, CA · Member since 2012 · 627 posts · 204 votes13y
Pat L., there is no way to respond properly to your post without more information. If the matter has gone to trial, what is the case name and court in which it is being tried?
It is highly unlikely, essentially impossible, that anyone would pay to have a building tested for lead (paint and cerramic tile) three times. Perhaps there was just some limited testing three times, or some such thing?
If the consultants did not test it properly, he would have valid claims against them, and would surely be going after them.
- 13yDion DePaoliPro MemberReal Estate Broker · Northwest Indiana, IN · Member since 2011 · 2k+ posts · 2k+ votes
A couple concepts in the OP that have not been mentioned. The state specific places to open your LLC such as Nevada and Delaware.
LLC's are still sort of new to the business world. As such, some states have a little longer history than others. Additionally, some states have a better body of law around the concept of LLC's. The greatest example is Delaware. Delaware opened up their LLC to out of state companies on purpose (for revenue). Because many companies opened LLC's in the state (some large) a good body of law around LLC's has been established thus making it an ideal place for an LLC to open opposed to a state with less legal framework abound the concept. Obviously, favorable to the LLC and its operators and members.
Other reasons you hear of Delaware and Nevada, is the anonymity of the members of the LLC. In Delaware the members of the LLC are not of public record. Creating a layer of insulation for the member. In Nevada, you can file either way, anonymous or not.
Then there is the simple issue of state tax. Those states do not have a state tax on LLC's. Another benefit. The filing fees for the LLC are very reasonable as well.
In both of those states, their LLC laws do not require a brick and mortar presence in the state in order to open an LLC. That is not true for all states.
So the take away, which has not been discussed in many of the BP LLC discussions is also, be aware of what business you conduct and what state you open your LLC in, laws are different from state to state and you should involve an attorney to at least advise on your legal protection.
There was a comment above which mentions, a tenant can pursue personal assets if an LLC is present. That is not a blanket true statement. The LLC affords a level of protection from the mingling of personal assets with those of the LLC. Provided the corporate shell can not be pierced no claim can lien your personal assets.
HOWEVER, some states will not allow a single member LLC. And piercing the veil can be simple if proper LLC protocols are not adhered to such as maintaining corporate mins and proper firewalls between personal and business assets.
Designing your 'practical' insulation from liability is not tough. In most cases a single LLC with good insurance is all you will ever need. I agree with Bill, if the general business operation is residential landlord, your tenants lack reasonable resources to bring claims against you that will exceed your insurance, if they had the resources they would own their own house not rent from you. For larger assets, such as apartment complexes with hundreds of tenants, you run the risk of class action suits or multi-plaintiff complaints thus bifurcating that asset from the rest of your business holdings adds a layer of protection from that suit seeking other business assets or personal assets from being included.
The other structures that were mentioned have tax and income benefits which would be individually unique. So when looking into what is best for you, you really should consult an attorney and an accountant.
- Investor · Mission Viejo, CA · Member since 2012 · 627 posts · 204 votes13y
I mentioned this to my wife, and she told me I had missed the possibility that they guy had it tested three times, all three found lead, and he either trashed or hid all three reprots. That is indeed possible, although I doubt such a crook would spend the money to have it tested three times.
- Lexington, KY · Member since 2010 · 315 posts · 133 votes13y
You've received good advice thus far, it appears.
I simply wanted to add: make sure you're not commingling personal and business funds of your LLC as such activities make it quite easy to "pierce the corporate veil", as they say. If you do not operate your LLC as a truly independent entity then the libaility protection it offer sis essentially nullified. This is true for other entity structures as well; something all sole proprietors and small partnerships need to be wary of.
There's plenty of info and examples out there if you google the issue.
- Investor · Las Vegas, NV · Member since 2011 · 188 posts · 116 votes13y
If you're concerned about privacy and want to make the owner(s) of the LLC hard to find, use a New Mexico LLC. They don't ask who the officers, members, or managers are.
All they ask is who organized it.
Wyoming also allows LLCs with a similar structure.
- Rental Property Investor · Upstate, NY · Member since 2012 · 3k+ posts · 3k+ votes13y
Originally posted by Stephen Masek:
Pat L., there is no way to respond properly to your post without more information. If the matter has gone to trial, what is the case name and court in which it is being tried?It is highly unlikely, essentially impossible, that anyone would pay to have a building tested for lead (paint and cerramic tile) three times. Perhaps there was just some limited testing three times, or some such thing?
If the consultants did not test it properly, he would have valid claims against them, and would surely be going after them.
Good points...
He mentioned that he had it tested several times each time he done some rehab work on the property.
However, those testing it made him sign waivers & according to his attorney they are immune from liability. We did discuss it at length, but unfortunately I haven't seen him around lately.
There are a number of cases in our area (NY) where damages were quite high.
The problem with Lead poisoning is the statue. The child/guardian is able to sue up until the 'age of majority' so landlords who may have sold a building many years ago can & have been held liable. So much for that old LLC (if they had one) or the strategy of equity stripping.
Furthermore, I believe it was after the late '90's that insurance companies/policies could 'exclude' lead poisoning coverage.The following is just one of the Law Firms specializing in such cases (on contingency) & it does give several examples of verdicts etc.
http://www.lipsitzponterio.com/Practice/LeadPoisoningMy point is that as RE investors we have to be very aware of the consequences no matter how diligent we are.
As they say 'ignorance (or being in denial) of the law is not a defense'. - Investor · Thermopolis, WY · Member since 2012 · 4k+ posts · 4k+ votes13y
OK first let me state that liability laws and corporation laws vary from state to state so the actual application of the information I am posting may vary from state to state.(disclaimer hehe) Corporations and LLCs do provide you with a LOT of protection from personal liability in MOST situations. The whole point of a Corporation is people pooling their money and forming an entity that is legally seperate in nature. It was originally used in Europe in trading companies. You put money in, if it goes bust you only lose the money you invested nothing more, ie. you buy IBM stock if the company makes money you get paid a return on your investment based upon the number of stocks you own. If they lose money their creditors can never come after you for the debts IBM incurred, it is technically a seperate person. When say IBM makes money it is taxed by the IRS based upon how much money it made. IBM pays that tax BEFORE they send you a dividend check, then the IRS taxes you AGAIN when you report that dividend on your taxes so it is a DOUBLE taxation but your liability from suit is still there as compensation for the double tax. You can never lose your house because an IBM employee made a programming mistake that turned off a child's ventilator and killed him.
Now a subchapter S Corp. gives you the same liability protection as any other corporation but the IRS pretends to ignore the corporation and simply taxes the profit or loss the subchapter S corporation made according to the stock percentage you own. If you own 25% then you get a K1 tax form from the corporation stating what amount of profit or loss is attributed to you. Corporations have many formalities you must follow to keep the limited liability status, like a prohibition on comingling money. That basicly means you treat the corporation money like your money and not like it belongs to someone else. Your property manager does not use the rent money he collects for you to make his car payment, that would be stealing. If you use your corporations money to pay your car payment your protection from liability can be lost by a court action called piercing the veil.(There are many other ways to pierce the veil) General partnerships never have protection from liability, in fact if a general partner makes a very bad deal and signs a mortgage for a million dollars then loses it all gambling all the other partners are equally liable for the mortgage even though they never received a penny of the proceeds. General partnerships are very dangerous as far as liability goes. Your partner can do something to cause you to be liable even if you did nothing wrong. People still like doing partnerships and you only get taxed once. The first LLC was formed in Wyoming I believe in the 1960s or 70s. Two oil companies did a joint venture under the new Wyoming LLC law and when they submitted it to the IRS they were given pass through tax status. (A guy named Bill Bagley did a book about most of this back in the 80s) This was huge. Companies could actually form a partnership that allowed profits to be split differently than percentage of ownership. So if 1 company owned oil drilling rigs and another owned oil leases they could make a deal and be taxed according to a seperate contract not percentage of stock ownership, but they did NOT have partnership liability. Subchapter S corporation stock cannot be owned by a corporation. So if you form 5 layers of corporation to protect from liability in a risky venture you pay taxes 5 times. LLCs allowed the formation of successive companies but still gave pass through tax status. You dont need a company if you only invest in the stock market, or buy CDs, etc. It is generally riskier investments that cause you to form a company. Most subchapter S corporation have shareholders who are actively involved in the day to day operations of the company. This is very important! As an owner of an LLC you are granted immunity from liability if you follow all of the corporate liability rules, BUT you are NOT shielded from liability for your own acts of liability for acts you personally perfom. If an IBM employee gets drunk at an IBM party and drives his IBM owned car home and kills a pedestrian in a crosswalk a shareholder cannot be personally sued for the damages. But even if you own IBM stock, if you were the IBM employee's boss and you poured his drinks and had the authority to stop him from driving the IBM car home you will be sued and you will lose. Having a corporation does not shield you from actions that you PERSONALLY do or do not do that harms another.
That being said the rules to follow to keep corporate protection are not really that tough, and they really do offer HUGE liability protection. Most lawsuits today are based on inaction, not action. Failing to install new concrete steps when the old ones have a 5 degree slope so a guest slips on ice and falls and beaks a hip, failing to turn down the temperature on the coffee pot after 2 customers complained and received 3rd degree burns(the McDonalds case). It is extremely difficult to get a personal judgement from the employee in these cases. If you personally install the furnace that is improperly vented and in violation of code and the family dies of carbon monoxide poisoning get out your personal checkbook. If you buy a home and it has a defective furnace and you dont realize it and someone dies only the company is liable. If you have 10 million in assets in a company or an LLC and get a 5 million dollar judgement against it you just lost 5 million. If you have 10 LLCs or Corporations with 1 million each and one gets a 5 million dollar judgement you just lost a one million dollar LLC but still have 9 worth one million each. (thus the value of multiple companies or LLCs)
The above information is over simplified, talk to an attorney and your tax accountant for more specific advice on what is best for you in your state. ALLWAYS USE A CORPORATION OR LLC AND ALLWAYS BUY INSURANCE. In Wyoming the filing for either is 100$ and the annual fee is usually 50$. Sorry this was so long. JerryW.
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