LLC Protection Questioned

11 Replies

In the slip and fall scenario, where the renter slips and falls on your property causing them to pursue legal action against you, what is to stop them from suing the business (the LLC) and you (as a negligent landlord)? Wouldn't this defeat the protection purpose of the LLC that I seem to read about everywhere?

I am about to market my first rental and am in the process of opening an LLC. I plan to put that property in there to separate it from my personal assets and all of a sudden I thought of the scenario above? Any thoughts? Am I thinking about this the incorrectly? The property and the LLC that will eventually own it are in North Carolina.

Thanks in advance.

@David Ferreras ,

I looked into putting my home rental under an LLC and was told I would have to sell the property to the LLC in order to put it under that LLC. This means, because I haven't lived in the home 2 out of the last 5 years, I'd have to pay capital gains tax of 25%. If your situation is similar to mine, consider whether paying the 25% tax on your profits is worth the potential benefit. Or maybe there are other avenues to roll it into the LLC that I'm unaware of.

@David Ferreras you are asking the right questions! North Carolina may have different State laws than Wisconsin, but the gernal principles should be the same. The protection an LLC offers is often misunderstood by new investors. It does not stop anyone from comming after you, but it limits your liability to the assets within the LLC. This is becomming an issue when your net worth is increasing and makes you a million dollar target.

You actually have several layer's of protection before you get to your entity.

First, run a good business. You can get sued for anything in the US in theory, but if you manage your property professional and keep it in good repair and safe, your chances of getting sued go down dramatically for 2 reasons: #1 your tenant does not hate you, #2 there is no good case for an attorney to take on. 

If it still happens, your landlord property insurance should cover it - if it was an accident and not your fault. The liability usually has a limit of a couple hundred thousand dollars. That covers most slip and fall cases. 

Next, you can also get an umbrella insurance, both personal and commercial, they will cover anything in excess of your regular insurance up to a million or two. It is very cheap, because the risk is very low. Chances are a slip and fall will cost less then 2 million - even if a judge finds you at fault (remember, your property is up to code, you have handrails at the stairs, you have a snow/ice service etc) 

Also, you are leveraged, so you don't have a whole lot of equity/net worth to come after, which makes it less attractive for an attorney to take on a lot of work, for maybe a little payday.

If all that is not enough, set up an LLC - it acts like a firewall if done correctly and contains the financial damage within the entity.

The other way round, here is what NOT to do: own a 3 million dollar appartment building free and clear so it's pure equity to go after, in run down condition, with burnt out lights and broken handrails on an icy winter day and nobody comes to salt, next you forget to pay your insurance and of course you don't have an umbrella policy. Your tenants also despise you, because you always increase the rent, while never repairing a thing. When you show up, you usually come either in a yellow Ferrari and make burn out's on the parking lot or in a Bentley with a driver. And of course you own the building in your personal name and it says it right on the sign: Junkview Appartments. Owner: David Ferraras.

LOL. Sorry, got carried away ;-)

Watch Brandon Turner's vieo on LLC on YouTube, you will better understand the pros and cons. And of course I am not an attoryney and this is not legal advise, just my amateur opinion ;-)

@Marcus Auerbach LOL! The yellow Ferrari bit had me bursting out laughing. In all seriousness though, thank you for the very detailed answer. To me, this is more of an irrational fear since I know I am trying to do everything correctly to code as well as not being an a-hole landlord. I have seen Brandon Turner's video on it but I just wanted to throw the question out there and see what other people have to say about it. I'll need to look into landlord liability insurance as well as the umbrella insurance policy. It sounds like those should have been done first before considering the LLC.

@Terry N. Thank you for the capital gains tax tip. I'll look into this further.

I'm not an attorney so this isn't legal advice

So an LLC has a corporate veil- that's what create protection. As soon as you intermix business/personal it is technically pierced. I'd say 75% of books I review have some personal expenses in them.

Also worth noting- some states have charging orders where basically a judge can force you to disperse assets from an LLC in some circumstances.

Hopefully an attorney chimes in- but to my understanding those are some of the shortcomings of using an LLC for protection vs. good insurance.

Follow what @Marcus Auerbach says here. First line: run a good business.

Second: Have Great Insurance

Third: Have Insurance on your Insurance 

Fourth: Have it in an LLC BUT, Be sure to run separate books for each property, NEVER commingle funds, and understand the LLC protections in the state you own the property, many States like WI, are problematic with single member LLC's not providing appropriate coverage.

Fifth: Debt, Im not a fan of Debt, but it can be a deterrent if the case breaks through everything else, but to get to this point I would bet it would be a Gross Negligence case, that would be circumvented by number 1.  

@David Ferreras

The LLC can get sued and you individually can get sued (civil suit).

For the civil suit, make sure you have a good umbrella policy. Check to make sure the equity in your personal residence is covered by homestead protection in your state.

For the LLC, the house title should be in the LLC name. Also, the LLC has to be an additional insured on the policy. You have to have separate bank accounts, no mingling funds. Otherwise, it will be grounds for pier ones the corporate veil.

The LLC the owns your property can in turn be owned by a Wyoming LLC. The reason for that is that Wyoming law has charging order protection. In other words, no one can take the LLC from you. If they get a favorable judgement, they can only access funds that you use to pay yourself out of the business. So you stop paying yourself and slap them with a tax bill. They will go away quick.

The vast majority of slip and fall lawyers work on a contingency basis, meaning they do not get paid unless they get something. When they see a WY LLC, they will not bother filing the suit.

@David Ferreras - nothing stops them from suing you. But if you have an LLC, and nothing else to show up as your assets (because you used land trusts to give you a layer of anonymity and a simple search is not revealing you are owning many other juicy assets) an ambulance chasing lawyer working on contingency will see a small target on your back and hard to get proceeds from victory in a lengthy lawsuit and move onto easier paydays.

If you get sued, and you lose (probably because you end up in a situation where insurance doesn't cover you, usually due to gross negligence or fraud), the LLC will limit the damage (depending on the protection offered in your state) to just a charging order or to what is owned by that LLC (that's why you have to consider what else you place in that LLC).

Keep in mind, a properly structured asset protection and LLCs will protect you also from "external" lawsuits - like when you make burn's out in that yellow Ferrari @Marcus Auerbach mentioned and you accidentally hit your friend Bentley, break his little toe, and he's nice enough to sue you for all you own - not only from your tenants.

@Trevor Ierien - this concept helps me a lot when I contemplate risks: going through the chain of events, and then basically watching the replay. 

On a more formal level you can draw up an Ishikawa diagram and brainstorm cause and effect, it's a fantastic method and super easy to capture all possible failure modes

@David Ferreras , you are asking the right questions. There are a lot of right and wrong answers depending on your situation. People say put ALL your assets into an LLC or several of them, use Land trusts to be anonymous, and that charging order protection will protect you. First laws vary from state to state. Next anonymity works well if you have a team of folks working for you like property managers, agents to do closings, stc. The problem is that your LLC is dam good protection if you never work in your LLC and it is all done by others and you treat it like a separate entity. Like what @Scott Schultz and @Marcus Auerbach vposted, don't comingle funds, keep good books and do not undercapiatalize.  The problem is MOST of the folks on BP are hands on investors.  We don't have enough money to be able to make money without doing things ourselves.  A $50K property will not support the cost of a property manager,  paid plumbers, and electricians, and a paid agent to do closings and collect checks, a separate set set of books and bank accounts for each house, etc.  We tend to deal with the seller personally.  We meet and interview the prospective tenants, we go to closings ourselves, and we sign the mortgages and personal guarantees, and sometimes we do0 the painting or install the carpet, or fix the leaky faucet, or even take the phone calls saying we have a water leak.  it is impossible to stay anonymous in that situation.  I think one of the things that concerns you is that they sue you personally, separate from the LLC.  That is a common tactic.  It is obvious you have personal liability on things like driving the company car, but drunk and hit someone, if you hire a roofing company to put a new roof on, but it blows off and hits your tenant or a neighbor, it is hard to see how that lawsuit has any chance to win against you.  Putting all your assets into an LLC has some protections, but you lose a lot financially too.  You have to pay rent, you pay taxes on the rental income you get from you, you have to use a commercial loan, not a lower interest personal loan, you lose the tax benefits of selling your primary home or homestead tax exemption, etc.  The sheer number of books you must keep up would be expensive if you had say 20 different properties.  The idea of putting mortgages on all of your properties is also scary.  When you take out the mortgage on them who gets that cash?  If you take it all out, pay yourself, well that means you have cash somewhere they can attach, if you put a fake mortgage on t or leave very little cash in it, that can be a basis to pierce the veil.  It is not one size fits all.  I have too many properties in one LLC, but the idea of having a separate set of books, a separate checking account for each property, a separate set of meeting minutes and franchise renewal each year, etc is actually scary to me.  With over 20 separate buildings the paperwork to do it right would be huge and very time consuming.

I use an LLC in my name, but own all my personal assets as tenants by the entireties with my wife, but my wife does not have any ownership in my LLC. So my wife does NOT sign on the mortgages, and she has no connection to any lawsuit from being a landlord, and my property cannot be attached for any debt she does not owe. Not all states have those same laws and those protections. So you need a plan for you based n the laws of your state. There are also some big tax issues for doing these things that you need your accountants input on.