Purpose of an LLC on multi-family

[Jacob Murry]

Hey Everyone, 

I have a pretty general question about LLC's. I've read several articles weighing the pro's and con's but I'd love to see BP members thoughts on these questions.

I've been advised to open an LLC for each property. (I'm currently a couple of weeks from closing on our first multi-family.) I understand the reason one would need an LLC in each property, otherwise you're not limiting your liability.. From what I've read - I'm pretty certain that is the route I want to go.

My question is - what exactly is the purpose of the LLC? The loan is in my name (and I've been told that since it isn't a commercial loan, it'll be best to stay that way,) and the deed is going to be in my wife and I's name. The only thing the LLC would actually be named on, is the lease agreements, and the bank account, correct? Is that still going to be serving the same purpose of protecting us individually? 

Which leads to my next and final question - Do we need to create our new bank account (for the investment property) in the name of the LLC?

Of course I'm not completely ignorant to these questions and I have an idea.. but if someone with a little more experience could chime in, I'd really appreciate any insight. 

[James Miller]

Originally posted by @Frank S.:

+1 to Thomas S

The LLC is a waste of time if you,

... do your own repairs

... show the place

... manage it

... mingle funds

In fact, a LLC is a personal asset you own, you have a personal interest in the LLC. A judgment against you will take that asset or force you to sell it.

Get Landlord Insurance and a good Umbrella. LLCs are overrated. Attorneys love it, as you will see.  

For some privacy and business identity, use a DBA. You can open bank accounts with DBAs.

Frank

I disagree, at least in TX. (Although I *do* agree about commingling business and personal funds.) 

A judgment against you personally will only create a charging order against a TX LLC and TX charging orders can't be foreclosed by the creditor. You can also make it (via proper formation) that the creditor gets stuck with phantom income but no distributions creating the chance for a pennies-on-the-dollar settlement. TX also doesn't allow a plaintiff to sue both the LLC and the LLC members in the same lawsuit.

DBAs do little for privacy as the *point* of the DBA is to make public who is operating under the assumed name. They might deter an unsavvy tenant's small claims lawsuit, but it won't deter a plaintiff's lawyer. If you want better (read as useful) anonymity, you can form a trust to own the LLC, and then use a DBA. Trust for anonymity, LLC for liability shield, and DBA to obfuscate the name.

Yes, insurance is necessary, but you better believe an insurance company will try and find any reason it can to deny a claim if you ever have a large claim. Insurance companies make their money by paying the least amount of money at the latest time. Umbrellas sometimes won't cover a claim unless the primary insurance covers the claim. Sometime, you should read your policy in full, noting precisely what is and isn't covered. It may surprise you. Large insurance policies also can (perversely) *attract* lawsuits, since the plaintiff lawyer knows he'll have someone to pay out a claim if he wins. You might also be surprised to know that your coverage amounts are often fairly easily discovered by a savvy plaintiff lawyer before you even get a demand letter. \

The correct choice is usually *both* a limited liability entity as well as adequate insurance.