Is a LLC really worth the money?

Question

Hi!

Need some advice. I own several 2-4 unit multi-family buildings in the Chicago areas with loans, but the banks are starting to question why the title has changed from my personal name to a Series LLC. Not only is this bothersome, but insuring any property in Chicago with a LLC is very expensive. On average, its at least $300-500 more expensive for just having a building titled in a LLC. In addition to this cost, I have the LLC annual cost and the headache of having separate LLC bank accounts for each property. So, for all the extra costs for having a LLC for supposedly extra legal protection, is it really worth it?

All in all, I have a great property management company looking after the building and my buildings are well maintained. Risk is always there, but I try my best to minimize them as best possible. With the slim chance I get sued, how likely is that a LLC will be able to  withstand the pressures of a attorney who is super motivated to squeeze every penny out of me?

My cash flow is tight these days and considering taking my buildings out of a LLC. Your advice will be greatly appreciate! Thanks! Johnny

Scott Smith · Answer

@Johnny Park I believe you have four main concerns: (1) cumbersome management of the LLC; (2) corporate compliance (am I managing this LLC so that it is effective in litigation); (3) due on sale clause because of the transfer to the LLC; (4) commercial insurance being expensive.

Here are a couple of my thoughts on the issue which I would be happy to answer in more detail offline:

(1) You may not need bank accounts for each Series if you are diligent with tracking the money in a single account. Think about a property management company that has 10 clients, they only have one account but their accounting software tracks which money belongs to which company. Legal "co-mingling" is more than just having the money in the same location.

(2) You need a yearly (and perhaps on-going) review of your company to ensure that you (1) are keeping up with any changes in the law and (2) that you have been managing the money of your asset holding company correctly to keep away from any piercing the veil or other actions which would lump all your Series together into one pot of assets. 90% of my clients hire me for this service which I call the "Family Office Plan"

(3)/(4) My colleagues and I haven't seen banks foreclose on performing notes based upon the due on sale. However, your current system is incomplete. You can increase your protection with anonymity trusts (to hold the asset anonymously on title) which look like estate planning and makes the banks and the insurance company think it is you personally owning the asset. They won't hassle you and will give you the personal insurance rates. This takes some skill to execute effectively but I have done it for my clients repeatedly.

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Joe Villeneuve · Answer

After you get sued, you probably won't ask this question again.  You always pay for risk controls and knowledge, because there usually isn't a "shelf life" on them.

then again, here in Michigan, it only costs $50 to register an LLC, and $25 each year to keep it in good standing.  Event so, unless you need to take out a small mortgage on each, I would do it.

Leon D. · Answer

@Joe Villeneuve is spot on. Hold on to those LLC's. A pain to deal with perhaps, but they'll be well worth having if something goes south.

So long as you really maintain them as entities unique from you personally (bank accounts, record keeping, bill payments, etc), the LLC's should be pretty well able to resist an enthusiastic, hostile attorney.

Johnny Park · Answer

My first real post on here and the responses are super helpful! This community is awesome. It seems like the experts agree to keep it in a LLC, which is likely what I will do. I think I need to stop penny pinching and look at the big picture. Thank you all again!

Simon Shih · Answer

https://www.biggerpockets.com/renewsblog/2015/02/12/bp-podcast-109/

Stewart Beal · Answer

Yes it is definitely worth it to have the property listed in an LLC.  Joe is right, it is all about liability.

Account Closed · Answer

An LLC separates your personal assets from your investment assets.  If the owner is an LLC, the tenant (or whoever is suing) has to sue the LLC.  The assets available to satisfy the judgment are limited to the value of the LLC. (This, in itself, can dissuade ambulance chasing attorneys.)  If you own it in your own name, all of your assets are on the line, your home, your car, etc.  (Keep in mind that someone can still sue you personally in a civil case regarding liability or some such thing.  Always a good idea to have a lot of personal liability insurance with an umbrella to increase coverage.)

Lisa Howell · Answer

There's a great read on corporations & LLC's, "Rich Dad Advisors: Start Your Own Corporation" by Garret Sutton if you want some detailed info on various entities and their advantages/disadvantages.

Peter Mckernan · Answer

Yes! 100% worth the money to form some type of asset protection for your company, rental property portfolio, commercial property portfolio, or multifamily portfolio. The minimal  amount you have to pay for the LLC does not trump the protection you receive financially.

This is a key item that is very necessary in real estate. It is the equivalent of asking if car insurance is worth the money. As the other gentleman spoke about, it is well worth the hassle of paperwork and the fees.

Good luck @Johnny Park

Is a LLC really worth the money?

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