Should I form an LLC?

Question

I have two rental properties in Texas in my name and was researching about possibly doing an llc for future ones. The draw backs of an llc are looking pretty bad like:

- lawers can pierce through protection

- insurance company lawers will only represent individual not llc

- forced to use commercial loan, which has higher rates

- confusion on how many LLCs to actually create

I like the idea of not getting an LLC and getting an umbrella policy of maybe 2 million. My plan is to purchase around 25 properties. Is this a bad way to go? Has anyone had over 20 properties in their own name?

David M. · Answer

Honestly, I think its a matter of your risk tolerance and your available time to manage.  I agree that piercing the corporate veil is also a risk, but its yours to make an issue.  If you keep your finances clean there won't be a problem.  Many people in my area (NJ) make LLC's for each property and to keep them straight they just use the street address for the name of the  LLC.  At least in NJ its cheap to make a single member LLC, then you need to create a bank account for it, etc.

If you are going for 25 properties, I'd personally wouldn't want that much risk on me personally so I would do them under a LLC, or a bunch of individual LLC's, or a chained/series LLC variety.  Yes, the interest rates will be higher all things considered they are very low still, and i have no idea what scale of acquisition you are doing so I can't judge the full impact.  But, thats the cost of insulating yourself from the liability which can be huge given how litigous we are in this country.

Oh, I'd like to comment on the insurance company lawyer thing...  I'm not sure I entirely get that comment.  For example, a LLC is issued Commercial General Liability (basically, any home improvement contractor has to legally have it, at least in the State of New Jersey), why wouldn't the insurance company lawyers represent the LLC?  I've had the discussion where the advantage of having your own insurance is they lawyers will represent the policy holder as opposed to maybe a sub added to the policy.  But, never had to distinguish between the the LLC entity and the LLC Member...  There must be some legal/insurance nuance that must be spooking you since on the surface it doesn't make sense.  The insurance company should be covering the policy holder.

Jerel Ehlert · Answer

Allow me to address what you specifically posted:

The law allows plaintiffs to pierce the corporate veil to hold the persons liable when the LLC is a sham.  Solution: maintain the formalities and keep the limited liability.

Insurance defense lawyers will protect the insured, regardless of the form that policy holder takes.

Depends on your situation.  Some buy and get a loan in their personal name, then deed over to the entity.  Sometimes commercial loans on commercial property have lower rates or have more products available.

That's a matter of your risk tolerance.

When you don't have any form of liability shielding or limitation, all your assets are available to satisfy a judgment that exceed the limits of your insurance.  What if the GL insurer denies coverage for any reason?  Then you will have to pay a judgment out of all the rest of your assets.

― Benjamin Franklin

David Disraeli · Answer

The difference between having zero personal liability and any is huge, not to mention no liability.  An LLC that is properly constructed and managed is NOT subject to being pierced.  Anything is possible but plenty of case to law to support that.  Of course, there are a number of ways to sabotage your own entity if you aren't careful.   A complete discussion of this is way beyond a blog post.  You do not need to use a commercial loan if you buy/finance first which is what all my clients do.  Lastly in Texas you only need one "series" LLC to maximize protection for multiple properties.  PM me if you'd like more information.

Cathy G. · Answer

I recently listened to a youtube show about LLC.  The speaker helped me understand the topic a bit better.  I don't know if we are allowed to link to to youtube.  Here is the title:Proper Use of LLCs for Real Estate  The group was real estate asset protection.  You can google it and find it in youtube.

Danny Webber · Answer

over 20 yes, I never did LLC's. I always carried 500k GL policies. Something catastrophic would have to happen to burn through a 500k liability policy. Also, you will need to max out all current property coverage before you can get an umbrella policy so all of your policy costs will go up.(from my experience)

Should I form an LLC?

Most Popular Reply