Business entities and insurance

3 Replies

I had just finished reading a post that was linked to the ultimate guide to real estate investing ( http://www.biggerpockets.com/renewsblog/2009/03/18... ). The post talked about how you should have a business entity (lets say an LLC) and also insurance to protect your personnel assets from any claims resulting from a mishap at one of your properties.

Lets create a fact pattern, bare with me. John owns an LLC with 4 properties (properties A, B, C, and D) under the LLCs name. John has the proper insurances and the LLC was properly formed with all the correct paperwork. A railing on the stairs breaks in property-A. Tenant-Jill files a lawsuit against the company because the broken railing caused Tenant-Jill to break her arm. The claim ends up exceeding the insurance coverage.

My questions are:

1. Are properties B, C, and D at risk because of Tenant-Jills claim?

2. If they are at risk, is it viable to make multiple LLCs to separate your assets? For example; have properties A and B under LLC-1 and properties C and D under LLC-2.

Any help is greatly appreciated! Thanks in advance. 

Kyle...Any assets held by the LLC can be at risk, if the LLC is sued. The LLC protects your personal assets, assuming you have not "knowingly or willingly" engaged in any sort of illegal activities, which would result in "piercing the corporate veil". However, you can use a Series LLC to avoid that issue. A Series LLC creates separate entities within an LLC, each being a separate "Series". Each individual series, as long as assets are clearly tracked and attributed to that Series, conducts business fully independently. As such, each Series can contract, sue & be sued, without jeopardizing the assets of the parent LLC or any other Series. Currently, MN doesn't allow Series LLC's, but they do recognize Series LLC's formed in other states. Many companies incorporate and form Series LLC in either NV or TX, because of the protections provided in those states and the low taxation on entities. Here's a link to some info on Series LLC's in MN...

http://thompsonhall.com/business/formation/limited-liability-company-llc/series-llc/

Also, as you proceed and grow your portfolio, you should talk to a good estate planning attorney to maximize your asset protection. Long term, you're probably not going to want to hold assets in either your name or the name of the LLC. You're going to want to leverage some blind trusts as well as likely using a 2 LLC structure.

This is a great site for information on asset protection specifically around REI...

http://www.lonestarlandlaw.com/

Thank you @Hattie Dizmond ! I have never heard of a series LLC before. Do you know if you can create an LLC then later on turn it into a series LLC. So if the new MN ammendmends allows series LLCs then I could change the LLC to a SLLC.

Currently I am not looking to form the business entity yet since I am strictly researching Real Estate. In the near future when I am finishing up my business plan I will be looking to meet with a real estate attorney and hopefully he or she can inform me more about MN laws/ regulations.

EDIT: I just read more in debt on that second link you posted. So from what I understand, your management company is the one that you would be marketing, making deals, etc. and the holding company is just there to have possession of your properties?

@Kyle Soderman  

I don't know how MN will legislate the Series LLC. However, in TX and NV you have to designate the LLC as a Series LLC, when it is formed. You DO NOT have to create it with Series formed, you just have to designate that the LLC will be a Series LLC. There is also special language - as a disclosure - that has to be included in the certificate of formation. You can't go back and convert a standard LLC to a Series LLC in either NV or TX.

EDIT: I just read more in debt on that second link you posted. So from what I understand, your management company is the one that you would be marketing, making deals, etc. and the holding company is just there to have possession of your properties?

That's correct. It's referred to as the "Texas 2-Step" or "Nevada 2-Step". That's advanced asset protection, but you understood correctly. To take it a step further, neither the Holding LLC nor the Management LLC does business, opens accounts or anything else in their own name. Both of them utilize DBA's. So, the properties held as assets would either have their titles transferred to the DBA name of the holding LLC or transferred to an anonymous/blind trust, which would only list the name of the trustee.

The idea is to simply make you NOT a good target for a lawsuit.  You have to remember that attorneys filing civil suits get paid on a contingency.  They don't make money unless they win or get the defendant to settle, then they get a % of the settlement.  However, they front all the money for the costs of the suit, which can become substantial.  With frivolous suits, an attorney will typically do a quick check to see if the subject of the suit has any easily attachable assets.  If they can't find anything, it's unlikely they are going to pursue the action.  It's simply economics.  So, by making it difficult to find assets, you create a barrier to legal actions, particularly the frivolous type.

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