LLC or no?

Question

LLC or no?

Answer

First of all this question should be sticky as it comes up every about every other day. Lets avoid the flippant and unhelpful answer basically stating “don’t be a slumlord and you have nothing to worry about”. With our litigious society you have plenty to worry about, and we all agree, except those true believers, that we would rather be in control of our destiny rather than leave it to the courts. God help you if you have to have a tort action adjudicate against you by the typical jury consisting mostly of the unemployed and government workers. I can provide specific examples of ridiculous tenant law suits which have bankrupted landlords. Pretending these frivolous lawsuits don’t exist and don’t bankrupt real people is willfully ignorant or naive. The second uninformed statement typically made in these similar “LLC vs Umbrella policy” threads, and for a long time championed by that fountain of erudite wisdom known as Joe Gore, is that “all you need if you are a good landlord is an Umbrella policy”. Horsefeathers. While a Umbrella policy is cheap and well worth buying, if you rely only on that to protect you, than please keep your fingers crossed and hope for good luck – you are going need it. When I first addressed this question in a forum post four months ago I actually asked who has any experience actually having to use their umbrella policy against a tenant lawsuit. The answer came back as crickets: No one on BP spoke up as actually having any experience utilizing their policy. So while everybody praises the value of an Umbrella policy for real estate liability none of these same people has any real experience employing their policy. We can all agree you cant form an expert opinion based on something you have never done, at this point we are all just talking out of our butts. There is only one person on BP that I know who has actually dealt extensively with this exact issue and has even adjudicated it as a Harvard educated lawyer, his name is @Jonathan Twombly I urge you to read his expert answers on this exact subject: http://www.biggerpockets.com/forums/12/topics/140550-best-way-to-protect-myself http://www.biggerpockets.com/forums/12/topics/140457-forming-your-llc I will summarize a few of his basic points against the unhelpful and inaccurate advice so far offered on this thread although I urge you to read his very intelligent responses yourself. 1. Your umbrella policy may be in deficient of the amount of the suit thus leaving you exposed to the difference. 2. Plenty of insurance companies with try to weasel word or otherwise get out of covering you if the suit is large enough rather then actually provide the coverage you assume you are getting under the policy. I think the second point should be pretty obvious that if your policy costs $25 a month and you have a suit pending for five million dollars that if the insurance company can find any feasible legal way to get out of paying they will earnestly try. Now regarding LLC. It makes no sense to disparage the LLC as some shady work around to avoid rightful liability. The LLC was invented for the exact purpose of limiting the liability as a pass through tax entity. That was the exact purpose of it's creation int he late 1970's when it started and quickly became popular in almost every state as a legitimate, accepted, and legally respected corporate entity. As long as there is no commingling of funds the LLC provides excellent liability protection, respected by most courts. Again Jonathan Twombly expertly addresses these exact points in the aforementioned threads.

Answer

The advocates of LLCs are mostly based on hype, good management is the first line of defense, if you are not negligent, you're not at fault. Keep a high level of liability coverage, that picks up anything that can be claimed against you, win or lose. Use business entities for business purposes, not your fortress against liability.Your CPA has studied legal issues and law more than 90% of the RE types here as to business entities and general liability, there is a law test in the CPA exam series, while they are not attorneys they have a greater knowledge than most. I suggest you follow that advice. :)

Answer

Having each properties in llc entity separately protects you if someone sues one property the other properties aren't affected. By not having in llc you risk all other properties that you owe and can come after the person who owes the property and sue them personally. Hope this helps.