All Forum Posts by: Ryan Coon

Quote from @Steve K.:

Quote from @Ryan Coon:

Given the conversation around the question of what benefits are offered by a multi-layered LLC structure I do think there are at least a couple of items worth noting.

Holding a property in an LLC can do a lot to help prevent liabilities from properties in the LLC from exposing assets outside of the LLC. We might call this inside asset protection because it helps keep liabilities contained inside the LLC. 

However, it is the unfortunate reality that many states provide only very limit protections to prevent your personal creditors (e.g. you cause a car accident and get sued) from going after the assets inside your LLC. This is especially true for single-member LLCs because many states do not see a reason to protect an LLC from the creditors of the LLCs sole member. These states will often provide multiple remedies to a creditor going after the member of an LLC, up to and including a charging order against the members interest in the LLC and foreclosure of that charging order. This means the creditor can invade the LLC and go after the assets inside.

On the other hand, there are a select few states, like Wyoming, that not only provide the same protections to LLCs regardless of the number of members, but also allow charging orders, without the possibility of foreclosure, as the sole and exclusive remedy that creditors of an individual have against that individuals interest in an LLC. These protections we might call outside asset protection because the help to prevent those liabilities that are coming from outside the LLC from exposing assets inside the LLC

Thus, if you have an OH property in an OH LLC and a CA property in a CA LLC (which provide inside asset protection) and then have these LLCs owned by a WY LLC (which provides outside asset protection) you can quite effectively mitigate risk no matter where that risk is coming from. The main point is that the state property LLCs and the WY holding LLC are not so much doubling down on the same problem, but rather are used to address two different problems—inside liability exposure and outside liability exposure.

All of this isn't even getting into the potential anonymity benefits and tax simplicity and efficiency (in particular when investing with a spouse or other business partner) that a holding company can provide. In a nutshell, when looking at a multilayered structure, it's important to see the different layers, not as repetitive or redundant LLCs, but as different tools for different purposes. Each layer should absolutely be justified by a legitimate need but the reality is that not all LLCs are the same and thus multiple layers may necessary for optimized asset protection, tax efficiency, etc.

 There was thread on here awhile ago where the OP asked if anyone had heard any good stories involving an LLC actually protecting someone's assets. I thought it was interesting that with the literally hundreds of years of combined investing experience on here, nobody could provide a concrete example of an LLC working as advertised: https://www.biggerpockets.com/forums/926/topics/1151922-than...

In your experience as an attorney, can you share your experience as to whether or not have you seen concrete examples of an LLC (or even better, a structure of multi-layered LLC's), providing protection from creditors effectively in an actual real-life suit?

Absolutely, we've seen numerous cases where the right business/LLC structure has provided major protections against lawsuits and claims. A good example of this was a client of ours for whom we setup a layered structure much like the ones we've been discussing. This client, had numerous real estate investments in a layered structure feeding down to a WY holding LLC. He was also involved with his dad in a club where his dad owned the property. When a couple of people got seriously injured and disabled on the property and sued both our client and his father for upwards of $15 million in damages, the plaintiffs settled with our client for insurance maximums because all of his major assets were protected and hidden behind the WY LLC. On the other hand, the plaintiffs would not settle for insurance maximums against our client's father who owned everything, including the building for club, in his own name because the father's assets were much lower hanging fruit to recover against.

In many cases like this, we see creditors/plaintiffs settling for low amounts when they, or more likely their attorneys, discover that any meaningful recovery against the assets is going to be an uphill battle at best due to the strength of their business structure. 

Given the conversation around the question of what benefits are offered by a multi-layered LLC structure I do think there are at least a couple of items worth noting.

Holding a property in an LLC can do a lot to help prevent liabilities from properties in the LLC from exposing assets outside of the LLC. We might call this inside asset protection because it helps keep liabilities contained inside the LLC. 

However, it is the unfortunate reality that many states provide only very limit protections to prevent your personal creditors (e.g. you cause a car accident and get sued) from going after the assets inside your LLC. This is especially true for single-member LLCs because many states do not see a reason to protect an LLC from the creditors of the LLCs sole member. These states will often provide multiple remedies to a creditor going after the member of an LLC, up to and including a charging order against the members interest in the LLC and foreclosure of that charging order. This means the creditor can invade the LLC and go after the assets inside.

On the other hand, there are a select few states, like Wyoming, that not only provide the same protections to LLCs regardless of the number of members, but also allow charging orders, without the possibility of foreclosure, as the sole and exclusive remedy that creditors of an individual have against that individuals interest in an LLC. These protections we might call outside asset protection because the help to prevent those liabilities that are coming from outside the LLC from exposing assets inside the LLC

Thus, if you have an OH property in an OH LLC and a CA property in a CA LLC (which provide inside asset protection) and then have these LLCs owned by a WY LLC (which provides outside asset protection) you can quite effectively mitigate risk no matter where that risk is coming from. The main point is that the state property LLCs and the WY holding LLC are not so much doubling down on the same problem, but rather are used to address two different problems—inside liability exposure and outside liability exposure.

All of this isn't even getting into the potential anonymity benefits and tax simplicity and efficiency (in particular when investing with a spouse or other business partner) that a holding company can provide. In a nutshell, when looking at a multilayered structure, it's important to see the different layers, not as repetitive or redundant LLCs, but as different tools for different purposes. Each layer should absolutely be justified by a legitimate need but the reality is that not all LLCs are the same and thus multiple layers may necessary for optimized asset protection, tax efficiency, etc.

I second the concerns pointed out by @Doug Smith. Use of an LLC can not only protect your investments from personal liabilities and vice versa, but a well drafted Operating Agreement for the LLC can go a long ways to lay the foundation for your partnership relationship. I've seen too many relationships—whether they be friends, family, or simple business partnerships—fall apart because they decided to partner on a business or investment and did not adequately plan for and anticipate the complexities and difficulties involved in the venture. Joint investments will just about always come with their share of difficulties and anxieties and if you don't plan for how to handle these it is far too easy for the partners to start blaming each other and taking out their frustrations on each other.

A well drafted LLC Operating Agreement (OA) can plan for and anticipate the difficulties and the unknowns of the joint investment. The OA should cover things like decisions making, how to handle deadlock, how to resolve conflicts, and how to exit the partnership. Drafting of the OA should involve input and agreement by all the parties and should absolutely be drafted, either by an neutral attorney who agrees to provide mutual representation of both parties or by coordination between separate attorneys who are independently representing the respective parties. Yes, this will be an expense at the start of your partnership but the expense often pays huge dividends not only in efficient resolution of disagreement, but also in avoiding unnecessary conflict.

Lastly, I'll just note that I often hear people excuse not having an LLC with a well drafted OA with something to the effect of "my partner and I have a great relationship, we don't need this". Unfortunately, it is with these "great" relationships that people often have the most to lose and when these relationships turn sour because of a business disagreement, they often sour much worse than other relationships. Thus, it is with these close personally "great" relationships that a well drafted OA often becomes more important, not less.

First, while an LLC isn't strictly required, using an LLC offers substantial enough benefits that it would be very highly recommended. Not only will an LLC provide legal separation between you and the investment sufficient to help mitigate your liability exposure, but it also give you the opportunity to lay the ground rules for partnership in the LLC's operating agreement. This can help you pre-determine how to handle operations, decisions, disagreements, and dissolution of the partnership. When money is involved, partnerships can go south quickly so having the rules of engagement laid out in advance can go a long ways to both mitigate and resolve conflict within the partnership. You should think seriously about having a competent attorney assist with drafting your LLC Operating Agreement rather than using some form template.

As for lending, as long as the the property is just a single-family or even a small multi-family (e.g. duplex), then residential lending is often ideal as you can often get better rates and may have greater flexibility to transfer the property to your LLC. However, commercial lenders can absolutely be viable depending upon the terms and rates you can get from a commercial lender.

As for insurance, you will want to work with an insurance broker to see what's needed, but a good "landlords" insurance policy is often a great place to start. I will let the insurance people in the BP community comment further on recommendations here.

Note: This information is for educational and informational purposes only and does not constitute legal, tax, or financial advice. No attorney-client, fiduciary, or professional relationship is established through this communication.

@Nicholas A. Generally the residential loans are less worrisome because most are Freddie or Fannie and this gives you a lot of room to transfer to an LLC. Commercial loans on the other hand, which may be what you have for multi-family properties, can be a different story because you don't have the luxury of relying on Freddie and Fannie guidelines. However, in my experience commercial lenders are often more willing to entertain transfers to LLCs so you may be able to simply ask for permission rather than play the "better to ask for forgiveness than to ask for permission" game.

At the end of the day, however, the ease with which you can handle the change depends far more on the specific lender and their policies than anything else, and there is a large span of variance between lenders. You may consider trying to see what others experiences are with the specific lenders at issue.

Hi Nicholas, this is a great question and one that many investors ask as they start to expand their real estate portfolios. While the decision of when to use an LLC for investment real estate is ultimately a personal choice, the benefits of using one or several LLCs is difficult to overstate.

Probably the biggest and most glaring problem of not using LLCs to own your investment/rental real estate is liability exposure. If, heaven forbid, a tenant or guest gets seriously injured on one of your properties and decides to sue you for damages, then any and all of your assets (both personal assets and investment assets) are exposed to this lawsuit if you are not using an LLC or similar tools for asset protection. I've worked with investors who have built a portfolio of real estate only to lose everything to just one or two lawsuits and have to start over.

Using LLCs can help you to silo or quarantine risk. For example, if you have 5 investment properties, and each one is in it's own LLC with robust Operating Agreements, then you can effectively limit your exposure to any single lawsuit to just the property involved. The LLC can act as a legal barrier to prevent liabilities for assets within the LLC from exposing assets outside of the LLC. Consequently, I think it's hard to argue that it's too early to get one or more LLCs setup if you already own investment real estate. In fact, in my experience, it is the investors who have only a few properties that benefit the most from utilizing LLCs because they have less ability to absorb the loss of 1, 2, or 3 properties to a single incident than investors who have dozens of properties.

As to lending, if the loans are backed by Freddie Mac or Fannie Mae, then you can generally transfer the properties directly into an LLC without creating issues because both Freddie and Fannie have issued guidelines allowing the the transfer of the properties to an LLC. If these are commercial loans or otherwise not backed by Fannie or Freddie, then you are correct that as long as you are paying the loan consistently and on time, it's unlikely that the lender will even discover the change because they have no reason to dig in and audit the account. The lender is getting exactly what they wanted and expected out of the deal. That's not to say that there is zero risk of the lender discovering the change and making a fuss about it, but the risk is generally very low.

Note: This information is for educational and informational purposes only and does not constitute legal, tax, or financial advice. No attorney-client, fiduciary, or professional relationship is established through this communication.

@Dave Hagen Your idea of having an entity function as a "temp agency" or "management services" of sorts is an interesting one and could possibly work as long as you cover your bases in terms of having appropriate management/services agreements in place to justify the relationship between the entities. Failure to have the proper documentation can both breakdown the asset protection benefits of the entities (as it could create comingling problems) and could get you into trouble with the IRS, so proper documentation to justify the arrangement as a common or reasonable arms length transaction cannot be overstated.

Then, this entity could sponsor a retirement account, such as a 401k and could make employer matching contributions (be sure to work a CPA/tax advisor to guide you through rules and limits of both individual and employer contributions to the plan), and otherwise provide a centralized entity to run employment related expense, payroll etc. However, I'm not sure whether in the end the juice will be worth the squeeze so you'll have to take a look at what goals and priorities are. 

Hi Gary,

If we're looking purely at which option is best for Elrod, then the first option where Elrod has his capital account balance paid first, with the remainder going to Stewart, is going to be ideal. The main circumstance where this would not be the case is if the property sells for far higher than expected such that the balance of the proceeds exceeds both partner's capital contributions, in which case Stewart would benefit from the the extra balance.

However, it's important to note that option two, where the partner's are paid pro-rata based on their original contributions, is going to be the legal default. Most states will have this default enshrined into law and the operating agreement for the LLC likely says the same. Thus, absent some terms in the LLC's operating agreement or some separate agreement between Stewart and Elrod to the contrary, it is likely that Stewart will force distribution of capital to be handled pro-rata. Whether these partners maintain a 50/50 capital account balance or not likely has little impact on this outcome, again assuming there are no terms in the LLC's operating agreement or separate agreement to the contrary. Thus, the partner's should review their state statutes and their operating agreement to confirm their rights and obligations when it comes to the proceeds of the sale and the return of capital.

Note: This information is for educational and informational purposes only and does not constitute legal, tax, or financial advice. No attorney-client, fiduciary, or professional relationship is established through this communication.

This is an odd situation you you've found yourself in, especially where the new title company won't alloy closing with an exclusion where the old title company did. It does sound like you're on the right track though by consulting with an attorney to get this across the finish line. Most likely you're options will be:

(1) Get a release/recission from the fireworks company. This is likely the cheapest approach assuming that (a) you can locate the company or it successor, and (b) they are willing to simply release rescind the lease and/or release there rights thereunder. A local attorney experienced in these types of title issues should have resource to help locate the old fireworks company where you have not had success.

(2) If you can't locate the fireworks company or get them to agree to a rescission/release, then you may be forced to file a quiet title action of with the county. A quiet title action allows you to take the issue before the court and have a judge issue a ruling to "quiet" the title by removing judicially removing the encumbrance/cloud on title being created by the lease. Typically you will have to show the court that you have made reasonable efforts to inform the other party (e.g. the leaseholder), up to publishing notice in a local newspaper (though the specific rules will depend on the state/county where the property is located).

Again, this is all assuming you cannot get the title company to allow you to close by simply excluding the lease from and encumbrances created by it from the policy. Occasionally, an opinion letter from an attorney could be enough to get the title company to capitulate and allow the closing.

Note: This information is for educational and informational purposes only and does not constitute legal, tax, or financial advice. No attorney-client, fiduciary, or professional relationship is established through this communication.

Frankly, I would love to see a few examples as well as I have not personally done a deep dive into the caselaw on this issue. That said, I have worked with hundreds of clients in the last few years who are involved in both long-term investing and flipping/wholesaling and I often recommend that people involved in both worlds simply avoid the issue entirely by keeping their flipping and wholesaling activities isolated from their long-term hold activity. You can do this by performing your flips and wholesales in a Corporation such an S-corp or C-corp. Because the corporation is a separate taxable entity from yourself, its the corporation that would get tagged as a dealer, freeing you to engage in investment activity outside of the corporate structure and remain classified as a real estate investor personally. I have yet to see this method fail and you get the added bonus of corporate taxation for your flips and wholesales which is generally ideal anyway.

Note: This information is for educational and informational purposes only and does not constitute legal, tax, or financial advice. No attorney-client, fiduciary, or professional relationship is established through this communication.