protecting what's held in an llc

Multi-Family and Apartment Investing
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protecting what's held in an llc

Jeff D.
Real Estate Investor · Portland, OR · Member since 2012 · 70 posts · 26 votes

All you hear and read about llc's is that they protect your personal assets if your llc gets sued and things go above your insurance limits.   So the slip and fall plaintiff can't get to your house, personal assets, etc.    Phew.  

But the overlooked caveat here is that the property held in the llc is up for grabs.   The llc doesn't protect the property it holds.  It just shields the llc member.    So basically,  if someone sues "the company" the owners are protected, but companies assets aren't .   Oh great.    

And further,   if the owner is sued for something that happens in their personal world,  like a car accident,   I believe the owners share of the llc that holds the property is up for grabs.  ie 100% If you're a single member llc.   Oh great again.   

So I'm feeling like all this talk about "never own a building in your own name,  use an llc,  protect  your personal assets"  is kind of silly.  Because the REAL  "asset protection" needed is protection of the properties themselves.         Because if you are at the level where most or all of your income comes from rental properties, THAT is what you want to protect.   Who cares about your house,  your car,  whatever.........because chances are MOST of your personal wealth and income is in the rental real estate you have held in those llc's.   

And and if you're a decent landlord, and have well maintained properties....odds are you are much more likely to get sued for a personal car accident vs something at one of your properties.    

LLC's only protect from a lawsuit coming from one direction, and it's kind of a slim chance direction.

So if i'm understanding things right....

1) llc gets sued - member's personal property is protected,  rental property is NOT protected.

2) llc member gets sued - personal property NOT protected,   rental property NOT protected

So how can one protect their income producing rental property from being up for grabs in the event of a personal lawsuit that goes beyond their personal umbrella policy??     

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Brian BurkePro Member
Investor · Santa Rosa, CA · Member since 2012 · 2k+ posts · 7k+ votes
8y

@Jeff D. I think your answer lies within the words represented by the letters...LLC stands for Limited Liability Company.  I think that NOT calling them ULCs (Unlimited Liability Company) is intentional.  Imagine a world where anybody could form an ULC and commit all the torts they want with no repercussions!  All sorts of hoodlums would come out of the shadows and the wild west would quickly ensue, and insurance companies would fold...there has to be some accountability.

The original intent of limited liability protection in the world of business entities is to protect, to some extent, the innocent. For example, you and a partner buy a property and hold it in an LLC. Your partner runs over a kid in a crosswalk on his way to the grocery store. A plaintiff in the ensuing lawsuit can reach the distributions made to your partner from the LLC but they can't take the LLC's real estate which would thereby deprive you, an innocent third party, of your property.

Or in another example, you buy a property and have 10 investors provide the cash to your LLC to make the purchase. A tenant falls off of a balcony and dies and the family sues. After the insurance is exhausted, the next asset to tap is the cash and property of the LLC. But they can't go to your 10 investors and take their homes, nor could they take yours (with exceptions...particularly if you were found to be personally responsible, such as if you were seen out there sawing off the support beams of the balcony in the middle of the night).

People selling asset protection services, and many people on BP who have read something somewhere will tell you that LLCs are the greatest thing ever and protect you, the individual investor making real estate investments for your own account, from all sorts of liability.  It's just not true.  Sure, there might be some limited protection in certain circumstances, but liability insurance is called liability insurance for a reason.  It's to insure you in the event that you are liable for a covered loss.  Nothing will give you unlimited immunity from all risks in the business world.

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  • Jeff D.
    OP
    Real Estate Investor · Portland, OR · Member since 2012 · 70 posts · 26 votes
    8y

    ........it's counter intuitive,  but it almost seems like if you held your rental property in your own name it could in fact be better because it's personal property at that point.   And say you have a management company llc.    So if there's a slip and fall at that rental property,  they sue the mgmt llc,  and the member's personal property (the rental property) is protected by the llc.   Right?

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  • Al D.
    Investor · San Francisco, CA · Member since 2017 · 303 posts · 327 votes
    8y
    I am not an attorney. But I studied this topic for my own benefit. To me, you are correct. And you are also not correct, as I see some benefits of having an LLC: First of all, having personal vehicles and primary residence in an LLC is useless - unless you can prove doing business activities with them. But there is still a good chance that this type of LLC would be “pierced.” With that, no matter how many LLCs you may have in your life, should you personally be responsible for a tort, like a vehicle collision with personal injuries, if your primary/umbrella insurance and your non-LLC assets should not be enough to cover a judgement, assets of your LLCs may be pursued - but not necessarily obtained. (I am not inclined to believe that having an attorney be the “face” of your LLC gives you anonymity in case of a judgement: while I have no experience with the legal declaration forms, it is my belief that one has to truthfully list all assets anyway. If that is the case, then somehow omitting an LLC or ten you may own, may constitute fraud, a crime. However, having an attorney be the face of your LLC may still be beneficial for general anonymity before - and potentially to avoid - a lawsuit.) If your LLCs are based in a state other than the state of the tort jurisdiction, the plaintiff’s attorney - unless also licensed in the LLC state - will have to hire another attorney there. If that state happens to be Wyoming, for example - where the ONLY thing that can be won against an LLC is a charging order - then the attorney may have a long time to wait for his payday. Now, that is a theoretical benefit of a Wyoming LLC. The problem for someone who is not a Wyoming resident (or those other states that specifically provide only a charging order) is that I am not aware of a court case that has decided the potential problem of your “domicile state” being the “end jurisdiction” state - thus a Wyoming LLC may be useless for anyone not living/doing actual business in Wyoming in the end... So, that’s for a tort in your personal life. The actual benefit I see in having an LLC hold rental real estate is that an LLC is the first thing a potential plaintiff’s attorney sees about you, the property owner. If it happens to be a WY LLC (just be sure to register it in the state where you perform your business activities - and since you are not a California resident, I am not saying anything specific to California,) then it may be all the “protection” you could ever need: injury attorneys work on “commission” - if they can’t collect on the judgement, they don’t get paid. Even if they stand to collect eventually - but it would take more steps than if there were no LLC protection - that alone may be enough to have them not take the case. And this is also where it makes sense to have one LLC per rental property. To quote/paraphrase Anderson Advisors, “An LLC is ‘Lawyer-B-Gone’ (spray.)” I tend to agree with this statement. Keep in mind that in criminal cases, the veil of the LLC can easily be pierced by the court. And, in any case, any LLC has to be run as an entity clearly separate from its member(s) in all aspects. Always carry insurance. An LLC is just another level of potential protection. Again, I am not a lawyer. The above is based on my own research. No legal advice given. I welcome disagreements.
    1Reply
  • Llewelyn A.
    Investor / Broker · Brooklyn, NY · Member since 2016 · 665 posts · 1k+ votes
    8y

    I'm in favor of Insuring UP your Liability Insurance.

    Don't forget that there may be added costs to having your CPA work on your LLCs.

    You still need proper Liability Insurance anyway, so why not just spend the money on getting better Insurance protection rather than LLCs?!

    From what I understand, the costs of filing your taxes for the LLCs can be quite high in places like California even if you are using a non-California LLC.

    There are all sorts of Insurance that you can use, especially Umbrella Insurance.

    So, Insure up to the max Liability Protection for:

    1) Vehicles

    2) Properties

    3) Personal

    If you had a $1 Million liability protection on each property plus you had a $2 Million Umbrella policy which protects you above any law suits that can win above their liability level, you have $3 Million of Liability protection per incident.

    I'm not an expert with Insurance, but it if you had all of this, then there may be only a few reasons to use LLCs.

    1) Partnerships where you may want to change Partners in the Future.

    2) In the case of larger multi-family properties, I would add the LLC.

    I'm not a Lawyer so consider the above ENTERTAINMENT!

    0Reply
  • Scott SmithPro Member
    Attorney · Austin, TX · Member since 2014 · 1k+ posts · 932 votes
    8y

    @Jeff D. You compartmentalize every asset into it's own LLC (best way to do this is through a Series LLC). The LLC should be formed in a state with advantageous Charging Order rules (like Texas). A lawsuit against you can't touch the LLC, and a lawsuit against one property won't affect you or the other properties.

    Insurance is great, always have it. The Asset Protection Company protects against different kinds of risk than insurance, and serves as a "stop gap" if insurance denies, excludes or provides insufficient coverage. The AP Company is your "worst case scenario" type of insurance, it is your last line of defense. Moreover, insurance only protects against accidents, an AP Company protects against other claims such as breach of contract, gross negligence, fraud, etc.

    Fact is that getting sued is like a flood, it is unexpected and it may not happen to you. But if it does, you'll be happy you have the insurance. Given we live in the most litigious country in the world, why wouldn't we purchase lawsuit protection insurance (which is an asset protection company)? 

    Podcast Guest on Show #109
    1Reply
  • Jeff D.
    OP
    Real Estate Investor · Portland, OR · Member since 2012 · 70 posts · 26 votes
    8y
    Originally posted by @Scott Smith:

    @Jeff D. You compartmentalize every asset into it's own LLC (best way to do this is through a Series LLC). The LLC should be formed in a state with advantageous Charging Order rules (like Texas). A lawsuit against you can't touch the LLC,

    Thanks Scott - i agree,  lots of insurance wherever possible.  And yes, this is a worst case scenario thing - but in a recent conversation with my insurance guy (who is in the trenches daily),   he left me feeling that it's not uncommon for lawsuits to reach beyond insurance.   

    So can you elaborate on that last sentence? How is your membership interest in an LLC (ie your building) protected If sued personally? My understanding is that is up for grabs (like some stock that you might own for example)

    0Reply
  • Brian BurkePro Member
    Investor · Santa Rosa, CA · Member since 2012 · 2k+ posts · 7k+ votes
    8y

    @Jeff D. I think your answer lies within the words represented by the letters...LLC stands for Limited Liability Company.  I think that NOT calling them ULCs (Unlimited Liability Company) is intentional.  Imagine a world where anybody could form an ULC and commit all the torts they want with no repercussions!  All sorts of hoodlums would come out of the shadows and the wild west would quickly ensue, and insurance companies would fold...there has to be some accountability.

    The original intent of limited liability protection in the world of business entities is to protect, to some extent, the innocent. For example, you and a partner buy a property and hold it in an LLC. Your partner runs over a kid in a crosswalk on his way to the grocery store. A plaintiff in the ensuing lawsuit can reach the distributions made to your partner from the LLC but they can't take the LLC's real estate which would thereby deprive you, an innocent third party, of your property.

    Or in another example, you buy a property and have 10 investors provide the cash to your LLC to make the purchase. A tenant falls off of a balcony and dies and the family sues. After the insurance is exhausted, the next asset to tap is the cash and property of the LLC. But they can't go to your 10 investors and take their homes, nor could they take yours (with exceptions...particularly if you were found to be personally responsible, such as if you were seen out there sawing off the support beams of the balcony in the middle of the night).

    People selling asset protection services, and many people on BP who have read something somewhere will tell you that LLCs are the greatest thing ever and protect you, the individual investor making real estate investments for your own account, from all sorts of liability.  It's just not true.  Sure, there might be some limited protection in certain circumstances, but liability insurance is called liability insurance for a reason.  It's to insure you in the event that you are liable for a covered loss.  Nothing will give you unlimited immunity from all risks in the business world.

    Podcast Guest on Show #2024
    3Reply
  • Manolo D.
    Contractor · Los Angeles, CA · Member since 2015 · 4k+ posts · 1k+ votes
    8y
    JEFF D. Make an LLC operate the “management and upkeep” of the rental. Put your asset (loan and equity) on a trust.
    0Reply
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