LLC or sole prop
Real Estate Investor · Fenton, MI · Member since 2008 · 946 posts · 153 votes
Yes I know this topic has been discussed many times. However I am accumulating more properties and I need to make a commitment to either forming an LLC or just staying a sole proprietor. I have heard and read that lawyers like the LLC because it generates easy cash for them to set it up, but any of their brother lawyers can easily "pierce" the LLC because the reality is that the LLC IS the landlord since we manage it.
The official line is also that LLC owners cannot represent their LLC properties in court for evictions yet I hear that many landlords with LLCs and even S-corps routinely do their own evictions with no problems from the judge.
So what has been all of your experiences? Have any of you been sued, but protected by an LLC? Have any of you had your LLC "pierced"? Have any of you with LLCs represented yourselves in court with evictions? Thank you in advance for informed opinions and experiences.
Forget about number of properties per LLC and think "amount of equity". If you have 5 properties with about $5k in equity each, your LLC's net worth will be roughly $25,000. Not bad, but not exactly a great target for a greedy lawyer and plaintiff.
However, what if you have 5 quad-plexes each with $200,000 in equity? Should all 5 go into ONE LLC? I wouldn't recommend it (and neither would my attorney). He suggests forming a new LLC for roughly every $250,000 in equity that your property portfolio contains.
Just how many evictions do you plan to have? I've been landlording for well over a decade and have had ONE, count it, ONE eviction. That's not to say I couldn't have one next month, but there's a lot of people running around saying evictions are part of the business. That's like saying automobile accidents are a way of life. Sure, they happen all the time, to different people, and nobody is immune, but if you're not taking steps to make them a very small part of your own life, then you shouldn't be driving... or landlording.
The main purpose in doing an LLC is for personal asset protection. I don't personally know of anyone having there LLC pierced, but I'm sure it happens.
I have represented myself on several occasions in the eviction process over the years.
Yes it has!
Despite my numerous requests, nobody has proved this claim. I've done quite a bit of research on the topic and most of the instances in where the corporate veil was set aside in court was during cases of fraud and misrepresentation.
My father used to work as a tax collector for the People's Republic of Kalifornia and on several occasions, took entities to court and attempted to pierce their veil and get at the tax evaders on the inside, but he was unsuccessful most of the time because the courts do not set aside legal veils readily. Unfortunately, that's about the most direct experience I have had with this issue.
Corporations and LLC were created for asset protection. If they didn't work, why are they still around?
I've asked this many times as well, i.e., real "war" stories from the front line. But despite all the newspaper articles and police shows on TV, I find a large majority of people never ever get sued.
Charles did you have any problems representing your LLC?
So the general conclusion is that an LLC is worth the filing?
An LLC is only worth what you put into it. If you pay the cheapest lawyer you can find (or do it on LegalDoom as the guy at the Summit liked to call it)... and then forget about it, it's probably worthless.
Create a lasting relationship with a respected lawyer who will advise you on all the rules... and follow those rules... my understanding is they are pretty solid.
Essentially, you can't go half way. Either do it right and get the protection, or don't do it at all.
Brother Lawyer chiming in on the topic. This has probably (hopefully) been said a few dozen times on here, but I'm new to BP and haven't read anywhere near most of the discussions yet.
Here's the deal. If you follow the LLC rules (treat it like a distinct entity and not your personal piggy bank) courts aren't going to set it aside and "pierce the veil."
I'm not sure where the idea originated that renegade judges are out there snatching up the assets of good, honest, hard-working Americans because they were bamboozled by their greedy lawyer into setting up a limited liability vehicle. I can just picture that nonsensical judge maniacally laughing as slams his gavel down, giddy with the singular glee of taking money from Decent Dan and giving it to Frivolous Fannie. Seriously? Maybe it started with some "land trust" guru. I don't know.
What I do know is that if the question is this: Are my personal assets better protected from claims against my business in an LLC or in a sole proprietorship? The answer is the LLC. Hands down.
In my area, you do need an attorney to do the eviction when the property is owned by the LLC.
I am considering the same thing at the moment however I do not have any properties, yet. I have met with both CPAs and layers to discuss this question. What I have gathered is this:
Get a few properties under your belt before you form a LLC. From your post it seems you have some properties so I would set up a LLC. Since I am just starting out I will start a sole prop. with an umbrella insurance policy.
There is some cost associated with setting up and maintaining a LLC and if you don't have enough properties to cover this cost and your cash flow goals then you will just continue to eat away at your profits.
Start with sole prop and move to LLC when you have a handful of properties.
Create a lasting relationship with a respected lawyer who will advise you on all the rules... and follow those rules... my understanding is they are pretty solid.
Essentially, you can't go half way. Either do it right and get the protection, or don't do it at all.
X2, I've been in discussion in the start-up section past few days where I said this exactly and was challenge for talking the only 10K allotted to start-up a REI to make certain I had good legal, accounting, planning, insurance team on my side from the get-go. I'm fairly net to BP too and nothing personal to any member, but I have noticed how quickly people are to give legal advice they know nothing about. I have made the mistake of listening to them long ago.
The fact of the matter is unless you practice state RE law no matter how much you read these forums, listen to people that do not practice it that are not current, you have very limited info that’s more than likely inaccurate. Another thing is just because there are people in numbers you know operating their entity under their own or limited guidance from true professionals does not mean the numbers are correct and they are not ticking legal time bombs.
If you look at all the hearsay as having a factual basis which none do, it would ref a case, statue, law, as lawyers do and even then in most cases it is still ambiguous, vague, or from a different state that has no cross reference to yours, needing local attorney’s, judges, and court processes to sort it out. Yes it’s money making racket like many areas of law, but that’s just another fact in the big scheme of things.
Me, I’ve decided to wait and build some capital until I can get an A-TEAM on my side to advise me properly.
My .02 :)
Thank you for that Andrew Isaacs.
I wish I could vote you up 10x for that common sense post. You echo exactly what I hear from my own attorneys, one of which is a real litigator with actual court experience.
"Treat your LLC or corporation like a separate entity and so will the courts."
I don't know how to @ someone, but thanks @Mitch Kronowit... that's high praise.
I have four properties with tenants in one of them. The others are in various stages of fix up, but they are all close to being in rent condition. I have heard that there should be about five properties per every LLC. IF LLCs truly protect your personal assets that is great, but it is expensive to hire a lawyer for every eviction. I still hear landlords telling me they just go ahead and do their own evictions, but it will be my luck to go to court and have the whole thing adjourned because I do not have an attorney representing my LLC. Of course most of you are saying that the LLC must be treated as separate so that would inherently mean I must hire a lawyer for every eviction since I am not licensed to represent this "separate entity."
Have any of you been sued and know for sure that your LLC saved your personal assets? My insurance guy says landlords are frequently sued.
Andrew Isaacs, press the @ sign and type the persons name and a window will pop up, scroll down and click on their name, I do this without any spaces, even I can do it! LOL
And, I'm glad to hear your opinions, I always say if it walks like a duck and quacks like a duck it must be a duck, if you maintain your entity, keep with good accounting practices and treat it as a seperate entity, it will be seen as one as needed.
I use to go to court myself with LLCs, they have changed that view since the entity is now another person (lol) and you can't represent someone else.
It was only a few years ago when they required that our municipal judge had to be an attorney and member of the bar!
I figured I would chime in from my experience as a plaintiff's lawyer. I think the most likely situation in which an LLC fails to provide adequate protection is when you manage the properties yourself. A plaintiff doesn't need to pierce the corporate veil to get at you; you can be sued directly for your negligence (e.g. you were responsible for fixing something, you didn't, and someone got hurt). The fact that you were working on behalf of an entity when you committed your negligence generally does not absolve you from liability. If you are hiring professional management completely unaffiliated with you to manage the property then I think the situation is different.
The other thing I would say about piercing corporate veils is that it is a high standard, but it does not take much in the way of evidence to get to a jury. In my experience, if you dig deep enough, you can usually find enough evidence (particularly for single member LLCs) to at least get in front of a jury on the issue of piercing the veil. That is when it gets really scary for defendants. Just the fact that you can get to a jury of your “peers” (who most likely will hate you as a landlord) and avoid summary judgment often drives up the settlement value of a case. Just some off-the-cuff observations.
Forget about number of properties per LLC and think "amount of equity". If you have 5 properties with about $5k in equity each, your LLC's net worth will be roughly $25,000. Not bad, but not exactly a great target for a greedy lawyer and plaintiff.
However, what if you have 5 quad-plexes each with $200,000 in equity? Should all 5 go into ONE LLC? I wouldn't recommend it (and neither would my attorney). He suggests forming a new LLC for roughly every $250,000 in equity that your property portfolio contains.
Just how many evictions do you plan to have? I've been landlording for well over a decade and have had ONE, count it, ONE eviction. That's not to say I couldn't have one next month, but there's a lot of people running around saying evictions are part of the business. That's like saying automobile accidents are a way of life. Sure, they happen all the time, to different people, and nobody is immune, but if you're not taking steps to make them a very small part of your own life, then you shouldn't be driving... or landlording.
Thanks for chiming in John. We could certainly use more attorney's opinions and experience here on BP.
Are you saying hiring a property manager helps shield the property owner from liability? I haven't seen that listed as an advantage of hiring a property manager anywhere. I think it simply gives the plaintiff another person to sue. Sure, they told the PM about that loose step, and they never fixed it or told the owner, and somebody tripped and broke something, but the owner hired the PM, so they're responsible too, correct?
Quite frankly, I'm not too concerned with genuine torts. If I personally, as a fact, screwed up and caused somebody harm, then I have to take responsibility for my own stupid actions. However, what does concern me are frivolous lawsuits. Perhaps you can mention those and how best to discourage some greedy tenant and his ambulance-chasing lawyer from going after an honest, responsible business owner just because they have a little cash in the bank.
Thanks again.
That is a good point Mitch
This is exactly the kind of thing that worries me. I think most people here DO manage the properties themselves. It would not be worth it to hire a management company. How bad does it have to be before you are "negligent"? If I install a porch rail, and their drunk Uncle Ernie falls over it, and they sue can they then get my house and pension despite the LLC?
It would be good to read some relevant case law here so we can have examples. This is a good discussion.
I've been thinking about this issue lately as well as I'm up to 4 properties now. I haven't formed an LLC yet, but am in the process of updating my umbrella insurance policy as another way to protect myself. I'm pretty sure there is no way to completely protect yourself from liability (life involves risk), but for where I'm at right now I think insurance is even more important than entity structure, especially with a smaller number of properties. It is also cheaper and less complex than worrying about how many LLC's to have.
One important tip I might provide since I'm going through the purchase of a new umbrella policy right now is to remember that most umbrella policies cover only above and beyond a certain loss threshhold. The policy I am getting kicks in after $300,000 in losses have been covered by the primary insurance on the property. So it's not enough to just get an umbrella policy and think you're ok, you also have to go make sure you have at least $300,000 (in my case) of liability protection on each primary insurance policy.
As far as cost is concerned, I'm paying $250 for $1M in coverage, could have paid $410 for $2M in coverage. No entity set up or attorney's fees, no additional bookkeeping requirements, no new tax filings... Not perfect protection, but a pretty good bargain IMHO.
Russ
as far as representing in court, here in charlotte, we can represent our own LLC in small claims court, provided you're a member of the LLC...never been asked to show proof of that...one judge asked me straight up once bc i was filing evictions for different buildings that were in different LLC's, and so she just wanted to make sure I was a part of both LLC's..anyways, once the tenant appeals to district court in my area, you do have to get an attorney
The other thing I would say about piercing corporate veils is that it is a high standard, but it does not take much in the way of evidence to get to a jury. In my experience, if you dig deep enough, you can usually find enough evidence (particularly for single member LLCs) to at least get in front of a jury on the issue of piercing the veil. That is when it gets really scary for defendants. Just the fact that you can get to a jury of your “peers” (who most likely will hate you as a landlord) and avoid summary judgment often drives up the settlement value of a case. Just some off-the-cuff observations.
I’ve worked for fortune 500 companies over thirty years now as an Engineer that’s why I can’t spell ;). I’ve designed, manufactured, written scheduled maintenance procedures both at the OEM and field service level. I took the LSAT to be a Liability Attorney but never pursued it. I’d like to see a liability case like this in court and council with good technical representation. In my industry, it’s the Federal Governments stamp of approval that is at risk regardless of whom owns, manages, occupies. I could imagine all the finger pointing in a Landlord/Tenant situation to the OEM’s, builders, city, owner’s, pm’s, etc….I know I could have the courts head spinning, I’d doubt as I said with good technical representation it is clear who owns the liability without a long evidentiary hearing.
This is my understanding based on several conversations I had with my attorneys and classes I had in business law. If you, yourself, install a porch rail on a property owned by your LLC, you are personally responsible for that porch rail since you have a duty to either build it properly or hire a qualified contractor to do it for you.
If you build a sub-standard porch rail yourself, that uncle, drunk or not, has a reasonable expectation it will prevent him from falling off the porch when he leans on it, and if it doesn't perform properly, you are on the hook personally. If you hire a qualified contractor to build the rail, and it fails, then the law suit will most likely be directed towards him, his license, and his insurance. Just what the heck is a court going to do to you? You hired a licensed contractor who is supposed to be the carpentry expert, not you. What more could you have done? Not much IMO.
Now, if either you or that contractor build a solid structurally sound porch rail and the drunk uncle still manages to fall over the top of it, the burden of proof will be on them. They will have to provide expert testimony that the uncle was injured or killed because of an inherent fault in the rail's construction and NOT because the victim was drunk and careless. Sure, the plaintiff's attorney will roll out the victim's widow and all the crying kids while trying to paint you, the evil landlord, as some callous greedy miser with no regard for human life or compassion, but the court will ultimately sort out the matter of law from the matter of fact.
Just be glad we don't live in North Korea. :-)
This issue of “negligence” interests me. I am also active in DIY forums and I do many of the fix ups on my properties. I am not a licensed anything, eg. electrician, plumber, etc. In the electrical field there are many codes required. Some of these codes are for safety sake while others are for convenience. For example in a kitchen it is against code to have two adjacent countertop outlets on the same circuit. It is much easier to run your cable to a GFCI and then power all the outlets downstream on the load side of that GFCI, but if you do this you are technically not up to code. The reason for the rule is to avoid nuisance trips for small appliances, but it is not dangerous to have an adjacent outlet on the same circuit. It may take a large amount of time to make something like this comply with code, and we know that time is money especially when there are so many other things you must do.
My point is that if there was some problem with the electrical that is unrelated a lawyer could technically get you by first asking if you are a licensed electrician, and then asking if all the work you did was “up to code.” Technically the answer to both is no, but what you did or did not do has absolutely nothing to do with safety issues.
I think you are way more optimistic than I am about our legal system. I can only hope you are right.
This is my understanding based on several conversations I had with my attorneys and classes I had in business law. If you, yourself, install a porch rail on a property owned by your LLC, you are personally responsible for that porch rail since you have a duty to either build it properly or hire a qualified contractor to do it for you.
If you build a sub-standard porch rail yourself, that uncle, drunk or not, has a reasonable expectation it will prevent him from falling off the porch when he leans on it, and if it doesn't perform properly, you are on the hook personally. If you hire a qualified contractor to build the rail, and it fails, then the law suit will most likely be directed towards him, his license, and his insurance. Just what the heck is a court going to do to you? You hired a licensed contractor who is supposed to be the carpentry expert, not you. What more could you have done? Not much IMO.
Now, if either you or that contractor build a solid structurally sound porch rail and the drunk uncle still manages to fall over the top of it, the burden of proof will be on them. They will have to provide expert testimony that the uncle was injured or killed because of an inherent fault in the rail's construction and NOT because the victim was drunk and careless. Sure, the plaintiff's attorney will roll out the victim's widow and all the crying kids while trying to paint you, the evil landlord, as some callous greedy miser with no regard for human life or compassion, but the court will ultimately sort out the matter of law from the matter of fact.
Just be glad we don't live in North Korea. :-)
Here are the holes in this line of reasoning and where it gets convoluted. For example, if you the owner builds based your own design they might be more liable for picking the wrong material, fasteners, assembly, etc, and not having a structures professional design it for crash loads, failure paths, etc, but not necessarily if there are material issues at the OEM level….. If one were to purchase a “rail kit” from company that can enter into the equation too, then the owner of the kit may be liable or both. If the OEM has a material failure like a rail and it can proven that the rail is sized incorrectly or of the wrong grade of material, etc, or the OEM failed to test to failure or establish max load, etc, then the OEM can be liable or any combination from the owner, to the kit, to the OEM can all share in the blame. I could go on and on, but you get the idea, why I said this could lead to a long evidentiary hearing, especially if lives or big money is at stake…..Happens! I just don’t think due to all the litigation it is reason for too much concern but I am no attorney, as stated probably depends on the assets involved and how hungry that makes attorneys.
Terry, I used this example because I was about to buy a rail for a two-step porch on one of my SFH when my wife noticed the instructions said "for decorative purposes only." The rail would certainly do the job of preventing a fall because we would fasten into the cement, but the manufacturer seems to be getting themselves of the hook and the buyer on it.
So to conclude will LLCs do the job of protecting your personal assets or not?