LLC work around?

Question

Hey guys, let me know your thoughts on this one:

I always wondered how this scenario would work. Plz give me your opinions. I love LLCs but being a small newbie investor it is impossible for me to get loans from lenders to LLCs as they want personal guarantees. How about I start a property management LLC and have that company (which is me) manage the properties I own. Would that cover me against potential lawsuits from tenants?

thanks

Mark Borgioli · Answer

I am not a lawyer and thus this is NOT legal advice, but I am an investor and here are my thoughts on this situation. If you are both the property manager and the owner then I'm pretty sure you can be sued in either capacity regardless if they are done in separate business entities. If, for example you are hit by an 18 wheeler you can sue the driver and/or the company he works for and generally people elect to sue the company as it has more money while ignoring the driver entirely as ‘you can’t get blood from a stone’. The same goes for your scenario. So, let’s say that there is a problem with the pipes and the tap water has made your residents sick. They may sue the property manager or the company that owns the house, and since you are both of those people that will allow them to go with whichever route is more advantageous to them, and it might even allow them to get a second chance at a lawsuit if they fail the first. Thus having two LLCs may actually offer you LESS protection than having just one.  In short I think that the idea of two LLCs will not provide you the extra protection you desire.

Jerry W. · Answer

Why are you afraid of personally guaranteeing a loan to your new LLC?  I still have to do that and I have been doing this for 20 years.  Setting up companies does help some with liability, but there can be some tax benefits to using an LLC.  Do you really think that 90% or more of the folks using LLCs to do REI do not have to personally guarantee loans?  Maybe I have it wrong  hehe.

Andy B. · Answer

As to your specific question -- as @Mark Borgioli says, the additional layer of an LLC management company will provide no protection.  A tenant is not forced to sue a management company if there is an issue - they can sue the property owner directly.  Adding an LLC management company will do nothing more than give the tenant another entity to sue in case of issue.  This would result in you getting sued as the owner and you getting sued as an LLC.  This would probably be even worse because in most jurisdictions, an LLC cannot be represented in court by a non-lawyer.  So, you would not be able to personally respond to a suit against the LLC, you would have to hire an attorney.

In regards to what others are saying, I believe the point being raised is that you state that you cannot buy a house as an LLC because the bank will not give a loan to an LLC without a personal guaranty from you. If you want the LLC protection as an owner, buy it as an LLC and give a personal guaranty to the bank to get the loan.  The personal guaranty is not a "liability" issue it is a statement to the bank that you personally will pay the loan even if the LLC has no money. In other words, giving a personal guaranty is the same as getting a loan in your name. There may be other reasons to buy as a person rather than an LLC (interest rate, loan options, whatever) but if the only reason is a desire to avoid a personal guaranty, you are worrying for no reason.

{I am an attorney, but I am not your attorney and I am not offering legal advice. This information is not provided in the course of and does not create or constitute an attorney-client relationship, and is not intended to convey or constitute legal advice or a substitute for obtaining legal advice from a qualified attorney. You should not act upon any such information without first seeking qualified professional counsel on your specific matter}

J Scott · Answer

Then buy the property in an LLC and have a liability policy (and potentially an umbrella policy) in place for the LLC.  The LLC will protect your personal assets and the insurance will protect your business assets.

I don't see any benefit in an extra LLC for property management if you just have one property.

Georges A. · Answer

Makes perfect sense!

thank you guys

Georges A. · Answer

@J  Scott  not sure I quite understood your point. are you saying that my plan of having a Property management LLC run my own properties is a good idea?

quick correction, I am not worried about the lenders, I am worried about the lawsuits from tenants (e.g. tenant falling down the stairs , etc)

J Scott · Answer

That's what an LLC is for, to protect your personal assets from business-related lawsuits.  You indicated that the only reason you were averse to an LLC is because of lenders requiring a personal guaranty -- but as Jerry said above, I'm not sure why that would be a concern or hindrance?

I'd suggest using an LLC (though I'm not an attorney, so take that for what it's worth)...

Georges A. · Answer

@Jerry W.  it is not the loan that I am worried about, it is the potential of some lawsuits by some tenants.

@Mark Borgioli  you have a very valid point but I am not sure that it is not legally possible. In other words I think separating the PM from my personal property may actually be beneficial. I think we'd need a lawyer to chime in on this one.

LLC work around?

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