LLC controversy

[Mark Forest]

The company entity issue continues to come up on this board as well as my landlord’s association. Here is a site that recommends against an LLC or corp.: http://www.johntreed.com/entity.html

For example it states:
“But in a tort where someone is damaged by your negligence, for example, you can’t say, “You have to sue my corporation.†The tort victim never signed a contract agreeing to that. They were just minding their own busiess when you hurt them. They can hold you responsible.â€

This site makes strong arguments. I am new to this so I just want to get all of your comments.

[NOTE FROM ADMIN - Our legal blogger has posted a direct response to this post that is an important read for anyone concerned about liability. It breaks down all the false info being spread on the subject: Please read:
Piercing the Veil: Holding Owners Liable for the Acts of the Business]

[James Hiddle]

John T Reed is a blow harded old man with way too much time on his hands.

A lot of his ranting is nothing but bashing others some for whom don't warrant it.

He's just a bitter old man. Sometimes I would like to go up to him and say "you can take whatever crap you spew on your site,roll it up nice and neatly into a ball and shove it up your candy a crooked letter crooked letter"

[Ned Carey]

John Reed doesn't have a lot of credibility in my eyes. From your link:
>asset-protection strategies are of questionable legality and ethicality.

That shows total ignorance on his part as to why the concept of corporations and entitles were created in the first place.

There is no controversy about LLCs. There are pros and cons to using various entities. You must understand what they will do for you and what they will not do for you. You must understand how to operate them properly.

LLCs and not a cure all for asset protection however I will not own an investment property in my own name. I highly recommend the books by NOLO Press on LLCs. Nolo is a self help legal company and they will give you a good understanding of them. I don't recommend "do it yourself" legal work, but I do recommend being educated when you talk to your legal professional.

[Account Closed]

There's no real controversy, but there is a lot of confusion.

The situation Reed is talking about is a very common one with small real estate investors.

Holding assets in an entity can be a very important part of an asset protection strategy. I do not hold any investment properties in my name, never have and never will.

But, no matter what eneity you set up, if you are the one performing all of the functions an employee of the entity, you have negated much of the protection the entity provides.

If you are the owner of the entity and you take some action or failt to take some action, you absolutely could be held personally liable for your actions or inactions.

No matter how to choose to structure your holdings, having adequate liability insurance is critical.

[Chris F.]

What is really needed is the input of an actually lawyer on this, but I'll take a stab (I'm not a lawyer)

An LLC offers the same type of veil status as corporations, with the same taxation as a partnership. BUT LLC's have limited precedents relating to LLCs and those in existence are limited, so I'd say that going to court won't always be a black and white issue.

Someone else was talking about the liability you incur as an employee, which is to say that as an "agent" of your own company, the company is liable for any torts you incur as an agent of the company

Translation- you run someone over backing out of the driveway of one of your properties, and they can sue the company, as you are acting on the company's behalf. And they can also sue you directly.

Also if you run someone over at your uncle's house because you're drunk, they can sue you and attach your LLC assets.

what an LLC DOES protect you from is if a hurricane wipes out your property and you're underinsured- they can take your LLC assets, but not your personal assets.

Again, I'm not a lawyer, but hopefully this helps

[Mark Forest]

Thanks for all who answered. I am not taking sides, but I hope those who criticized Reed at least read the article first. My concerns are that an individual can not represent his corporation or LLC in court for things like evictions, etc. I also wonder why I would want to set up an LLC or S-corp if it is true that one could sue me individually anyway.

[Will Barnard]

I also wonder why I would want to set up an LLC or S-corp if it is true that one could sue me individually anyway.

Anyone can sue anyone these days. The point is, if you operate your biz in a professional and competant manner, you reduce or even eliminate the chance of someone winning the case. Taz said it best, there are reasons for using an LLC and advantages to it, but you must do it and operate it correctly, otherwise, you do stand the chance of the corporate veil being pierced.

I like this statement the best as it is very accurate:

Originally posted by Taz:
There's no real controversy, but there is a lot of confusion.

[Mike C]

Mr. Reed is just another guru who thinks his way of doing things is the best way (like most gurus). I read somewhere he hasn’t done a RE transaction since the 70 or 80s (if memory serves). He of course sells courses and info to “help you†while criticizing pretty much everyone else. Not much credibility in my book.

His article about entities doesn’t present any info that most real investors don’t already know. I don’t understand why someone with an entity of any kind would not want to use an attorney instead of themselves for legal matters. The phrase “A client who represents himself has a fool for a client†comes to mind. As stated, no entity or strategy is 100% foolproof. It is a tool that needs to be used correctly and for the right reasons. Bottom line: Get professional advice and listen to gurus at your peril.

Good investing

Mike C

[Mark Forest]

Mike C

Do you use a lawyer even for evictions? I have heard those are straight forward enough so that it does not justify paying for a lawyer.

What are some of the specific problems some of you have with Reed's statements? I think this issue is important enough that it warrants more detail.

[Mark N.A]

Steve -

State requirements vary concerning evictions. Here in NC the owner or manager can handle them. Always be very prepared, always be totally honest, always read and understand the pertinent statutes. I have gone to small claims court a fair number of times and have always prevailed except once (my fault, didn't understand the evidence rules). I once even beat a blow-hard pus-sucking lawyer hired by the family of the defendant.

Of course, if you live in a Socialist Republic where renters are a protected species you're out of luck.

Lastly, I'm in the minority here, but I like John T. Reed and have several of his books.

[Ned Carey]

Originally posted by NC Mark:

Lastly, I'm in the minority here, but I like John T. Reed and have several of his books.

I have heard that his books are very good. I just don't agree with some of his points. He discredits some RE instructors that are very good. In his zeal to discredit instructors that he uses some pretty arcane logic against some legitimate techniques.

[James Hiddle]

Originally posted by NC Mark:
Lastly, I'm in the minority here, but I like John T. Reed and have several of his books.

Don't worry Mark we won't hold it against ya :mrgreen:

[Brian P.]

Good grief, so much bad info.

A properly set up LLC is better then a corp. I owned an office building and one of the law firms that rented from me loved suing corps. The secret was just suing everybody, the board, the employees, the stockholders, etc.never seen one case where their assult didn't work.

On the other hand a multi-member LLC with the proper set up has withheld assult by the legal profession. Suggest you find a lawyer that really knows asset protection

A person can sue me and win but lots of luck getting to my assets in the LLC. Ask OJ how he keeps the brown family out of his pocket.

[Will Barnard]

A person can sue me and win but lots of luck getting to my assets in the LLC. Ask OJ how he keeps the brown family out of his pocket.

Well it is certainly not because his assets where in an LLC! The reason is due to the way his retirment was set up from the NFL by his attorneys. There are certain ways to set up retirement accounts that shiled those assets from any and all litigation.

[Matt Mathews]

Quick note to all here! It would be advisable, no matter what legal entity you may so choose for you Real Estate business, to be keenly aware of the fact that the IRS is aggressively going after LLC/Investors who have been using the Professional Real Estate designation on their tax returns to offset losses etc. and holding property in Individual LLC's. A sandwich Trust is a much more prudent alternative. Talk to your Attorney/Tax Advisor.

[Joshua Dorkin]

Greg Boots, one of our resident experts on the subject of law, has responded to this post with a full article on our blog that is a MUST READ! He breaks down all the false information being spread on the subject.

Please read:
Piercing the Veil: Holding Owners Liable for the Acts of the Business

[Will Barnard]

As always, Greg makes sense of a topic that is not so complicated, but made that way due to all the guru propoganda and the miscommunication of information.

Way to go Greg!

[Greg Boots]

Josh and WIll,

Thanks for the great feedback!

[Mark Forest]

Mr. Reed has a vastly different opinion from most of the posters here. I am certainly not an expert on this, but it seems it should be possible to do something like a NEXUS/LEXUS search to find how many times the corporate veil has been “pierced.â€

[Will Barnard]

I don't see how but perhaps our resident due diligence king Taz can think of something.
Either way, what does it matter, I say. The key is what YOU do and how YOU operate YOUR biz, not how many times others had their corporate veil pierced.

Run your business according to the specs and recommendations Mr. Greg Boots laid out and you should be fine. Also carry adequate insurance and even an umbrella policy for added protection.

[Account Closed]

Originally posted by nationwidepi:
I don't see how but perhaps our resident due diligence king Taz can think of something.

LEXIS has all published cases and summaries of many non-published cases but not all. On the non-published ones they try to get the ones that advance or substantially reinforce some legal principle or create new case law.

The most frequent ways these veils are pierced are due to fraud, not running it properly (including under capitalization and under insuring) and not filing the annual paper work and paying the annual fees.

Either way, what does it matter, I say. The key is what YOU do and how YOU operate YOUR biz, not how many times others had their corporate veil pierced.
Run your business according to the specs and recommendations Mr. Greg Boots laid out and you should be fine. Also carry adequate insurance and even an umbrella policy for added protection.

That is the only way to do it. Any entity will protect you only if you exercise good judgment in running your business. Fall outside those bounds and your protection is easily stripped away.

[Mark Forest]

I think the number of incidents where the corporate veil is pierced is relevant. If it occurs often then all the “asset protection†is a waste of time. If the reason the corporate veil is pierced is really because the owners of the corp or LLC neglected some procedure than that fact should be revealed in the judge’s opinion.

I just suggested Lexis, but what ever method is used I think this would be a worthwhile research project. If I had a little more experience I would do it.

[Brian P.]

Will

Your half informed again. OJ's retirement income is the same as anyone else's, it can't be attached.normally. You can't attach my social security, you can't attach a retirement pension I have, And you don't need a high priced lawyer to prevent that.because it's a law.

But OJ had lots in income and assets that were not covered or protected and were put into a multi member LLc which requires that all the members must vote for a property to be removed from the LLc per the operating agreement.

Why do you think he moved to Florida, it was because your personal home at the time no matter how much it was worth could not be attached. Plenty of money was moved to Florida and invested in residences to protect it from creditors.

As long as his kids and he always vote not to remove any property,from the LLc, the courts have upheld in many test cases that the property is untouchable, not just in OJs case,.

[Mike C]

Steve,

Sorry, I have been gone for a bit. I do use a lawyer for evictions. In many places if you have title in an entity, you must use a lawyer as representation in a court proceeding. I am sure that isn’t the case everywhere so find out what is the law or requirements in your own area. I don’t understand why anyone would want to do an eviction him or herself. I am not an expert on every nuance about evictions and don’t care to be. I use the attorney because they are experts at it (hopefully). I would use an attorney even if I didn’t have too. If you do something wrong it lengthens the time it takes to complete your eviction. Some things you could have done wrong include taking a payment late trying to be a nice guy, not filing your eviction in the proper time frame and so on. Many things the casual landlord might screw up. Time is money. It is money well spent IMHO. You are better off spending your time on other things, like looking for your next property.

Treat it like a business. You wouldn’t write your own contract or try your own civil case would you? Would you go to the court house and do your own title research? You wouldn’t change your own tires on the car would you? It is the same thing with evictions. Use a professional.

Just think if you made one mistake and it took only one extra month to get then out (you hear horror stories of really bad professional tenants as well). That is one month rent you lose minimum and probably more (ignoring deposits and potential judgments for a minute). Now if you did it right the first time and don't have delays, you have now already saved enough money to pay for evictions for six months or a year, depending on how many properties you have. What if you save two months revenue using a pro?

I would recommend going to court just to observe sometime though. It is pretty interesting.

Good investing

Mike C