Was your LLC put to the test?

[Bryan H.]

There is always much debate on if an LLC is needed. I have one. Only because someone told me to hold my properties in it for protection. I paid a lawyer to draft it and I signed it, and filed it away. I read most of it, but I honestly couldn't tell you if it was even worth the paper it was written on. If I was sued, I wonder if I would actually be protected.

I'd love to hear from people who had an LLC that actually protected them from being sued and found liable for something.

[John Chapman]

This is a great question, though I suspect responses will be limited only because it's probably not that common. I'll go ahead and throw out an example of a lawsuit my firm was involved in a couple of years ago, in which I would say the LLC worked as it was supposed to. (I had no personal involvement with the case.) It was a larger apartment complex with separate management. A little girl was run over and killed in the parking lot by an employee of the manager, and the entity that owned the apartment, the entity that managed the property, the manager, the driver/employee were sued. I think the theory was there should have been children playing/ speed limit signs and speed bumps. Long story short, there was a $1M verdict against the defendants, all of which was covered by insurance.

I would say the LLC worked because there was zero consideration given to suing the passive owners of the property who had nothing to do with the management or operation of the property. It would have been a waste of time, and I think that most plaintiff's lawyers would have reached the same conclusion. Also, there was insurance, so there wasn't that much incentive to go through the quixotic attempt to pierce the veil. (This was a professional operation and not some mom-and-pop single member LLC, so they had probably done everything right.)

I would also say that the case illustrates why smaller investors who manage their own properties or are otherwise actively involved should not over-rely on LLCs. Everyone who had any active role with regard to the property got sued, and I believe there was liability placed on everyone. I would also say that the case illustrates the importance of liability insurance. At the end of the day, everything was covered by insurance, and the LLC ended up being superfluous.