Does an LLC trully protect landlord?

Question

I discussed this in the landlord forum, but I am hoping for some more input. I know it is very common for real estate investors to hold their companies in an LLC. However after reading Mr. Reed's comments at http://www.johntreed.com/entity.html I wonder if this is a good thing to do. I have noticed that asking a lawyer about this is like asking a barber if you need a haircut. They automatically say yes. However, if as Mr. Reed says the owner of the LLC is routinely pursued personally when the "veil is pierced" it does not make any sense to form an LLC.

The major disadvantage of forming an LLC is that you can no longer represent yourself in court for evictions. I would like to know from any legal scholars how to go about researching the number of times landlords who have LLCs are pursued personally in lawsuits. If this happens all the time it is pointless to have an LLC. If landlords are routinely protected by LLCs I would look at it differently. In the last issue of Mr. Reed's newsletter he brought up a couple cases where business owners were indeed sued personally in spite of their LLC. Thank you in advance for all advice.

Mark Forest · Answer

Dean thanks for your reply. However, I have noticed that many people just automatically form LLCs because they have been told it is a good idea and that "they protect you." I would like to have some proof of this by knowing how often attorneys attempt to pierce the veil and if they are successful. Do judges routinely forbid it or do they allow it? I am hoping someone who knows their way around a law library will tell me where to start looking for my state of Michigan.

Chris Martin · Answer

Technically, the LLC can't represent itself because it isn't a person. That doesn't mean a member of the LLC can't represent the LLC. In fact, that is exactly what happens. On the form in my state, just put "member" under your signature... or you could (I've not done it) sign under "agent of the plaintiff" and also put "member" under your signature. The plaintiff is your LLC, the representation is from a member of the LLC (or an attorney if you so desire.)(

Rob K. · Answer

In landlord-tenant court in Michigan, you can represent yourself or have a lawyer represent you. In some courts, an LLC can not represent itself. A lawyer must. It is up to the judge of that district court. Most of the time, the tenant doesn't show up to court. In that case, you need to wait 45 minutes and then you get a default judgment. If they do show up, I always explain to them that they will get 10 days to pay or move, whether we go in front of the judge or not. I let them know that we can wait for all of the other cases before ours to be heard, or we can sign a consent judgment right now. Sometimes I will give them more time to move just to get out of there faster and encourage them to leave the house in nice condition in exchange for my kindness. I also see how much money they have on them and try to get that in exchange for more time. I then reduce the amount owed on the jugment and we sign it. It's similar to traffic court. You can represent yourself or have a lawyer.

Account Closed · Answer

Wow, it IS different in CA, much different. I guess I should preface my remarks with if you live in CA you want to hire a lawyer. There are lawyers that make a whole career out of evictions, they are good at what they do and reasonably priced. And, on the opposite side, there are lawyers that make a career out of defending tenants. I know in the Antelope Valley (Palmdale, Lancaster) there is a law firm that advises tenants to exercise their right to a jury trial thereby dragging it out so long as a landlord if you win you lose and if you lose you lose, unless, you settle for the $2k they want to go away, in which case you also lose . . . it's a legal shake down. I've lived here so long I've come to accept the abuse as normal, without question. I never imagined there was a place in the US where somebody would be held responsible for there actions. Maybe there is hope:) Anyway, Reed is from CA, he should know better than to make a blanket statement like a major disadvantage of an LLC is that you have to hire a lawyer. I like a lot of what Reed has to say but I think he is slightly off on this one. Not a big deal either way, I'm not really criticizing anybody.

Kyle J. · Answer

I wasn't aware of this. IF this is true, who is supposed to represent you if you're sued? Seems odd that you wouldn't be able to represent yourself. Not even sure how that would work in small claims court because in small claims court (in California) you're not even allowed to have an attorney represent you.

Rob K. · Answer

California might be different, but in Michigan it's a waste of money to hire a lawyer for an eviction. Thw law is clear that a tenant has ten days to pay or move. I've represented myself in court many times and it's always the same. Ten days. Pay or move. It's a very easy process. A lawyer would just add hundreds of dollars to the eviction cost.

Henry M. · Answer

No I do not feel secure unless my share is a trust... Of course if there are other managing members within the LLC, usually you will need there approval - of course also contingent on your by laws within your LLC... But in general, an Inter Vivos Trust will give you better protection.

Account Closed · Answer

Steve Might, most investors i know, including myself, have an eviction attorney represent them (or their LLC) in court. There are many attorneys that specialize in evictions, they are very good and very cheap. I wouldn't dream of doing it myself, the cost is very small compared to the time savings and the much reduced brain damage. So, when Mr Reed says not being able to represent your LLC in court is a major disadvantage, it makes me suspicious.

Ned Carey · Answer

I can't speak for your state but that is not true in Maryland. How much protection an LLC will give you is somewhat dependent on your state and how court precedents have been set. Keep in mind you are always responsible for your own actions. If you drive over a little old lady while going to collect rent, the LLC will not help you. It was you driving the car. If you are a single member LLC you may not get much protection. However I believe small LLC are pierced as much by being improperly run as anything else. Having an LLC does you no good if you do not follow the proper formalities of running a company.

Dean Letfus · Answer

I help clients invest in the USA from around the world and we always use LLC's in states where they can't be easily attacked. In Tennessee for example it is very difficult to pierce the veil unless it can be shown you were mixing personal and business activities in the LLC. I also make sure the house insurance has at least a million in PI cover and make sure the client is added to the PM's insurance cover which is 5 million.