Owner as Property Manager... LLC for negligence liability?

Question

Hi all:

I've got two rental properties that I'm about to put into LLCs via Land Trusts. I'm pretty confident this will take care of my concerns about homeowner liability and the "due on sale" clause.

My remaining concern is the risk that negligence carries. Because I am small, I am managing my own properties. I understand this still puts my personal assets in the line of sight for a negligence lawsuit. My personal assets are enough that I want to ensure their protection.

So how do you all handle this? Do you form an LLC for the sole purpose of property management? And do you get the errors and omissions insurance in the name of that LLC? What else? Am I on the right track?

Your experiences and advice are invaluable!
Thanks in advance.

Keith Barton · Answer

Bienes & Jon:

Please note Bienes originally said the corporate veil cannot be pierced unless for fraud and misrepresentation (which is 1 part of the test for fraud btw). This is not inconsistent with what Jon is saying.

Assume the following #1:
I own an LLC.
The LLC owns a rental property.
I perform management functions for the LLC and the property.
I, in my capacity of working for the LLC, make a decision or perform an act that is negligent.

Tenant sues me personally for my negligence. Tenant can win and can collect against me. I can lose my personal house and assets, etc.... An LLC does not protect me from this - BUT this has NOTHING to do with piercing the corporate veil. It doesn't need to. I directly was liable for negligence. Because I was directly liable, I am on the hook.

Piercing the corporate veil means something was done improperly and the owner of the business entity should not be given the protection normally afforded to the owners of a business entity. However, in this situation - I was DIRECTLY negligent. No need to pierce anything....

Assume the following #2:
I own an LLC
The LLC owns a rental property.
The LLC employs a manager to manage the property.
The manager performs some negligent act.

Tenant sues me personally. Tenant cannot (should not) win against me. I personally did nothing wrong. Tenant sues manager. Manager was negligent, manager is liable for the negligence and is responsible to the tenant for damages. LLC is liable because the LLC owns and manages the property (or the LLC only manages the property doesn't matter for this scenario). LLC is liable also, LLC responsible to tenant for damages. I personally have no liability. My personal assets are not at risk. I might lose the rental property, but not my personal home.

The only way my personal assets would be at risk in this scenario is if the corporate veil is pierced. THIS is when I have to worry about fraud. Negligence is not enough to pierce the corporate veil normally.

Bienes was talking apples and Jon was talking oranges.

Account Closed · Answer

I am not a Florida lawyer, but I suspect that your lawyer is wrong.  If you have a single-member LLC and you act negligently, the plaintiff can sue you personally and there is no need to pierce the veil.  I cannot find, from a google search, anything specific to Florida on this issue, but I believe this rule is universal.

From an Illinois attorney:

[/http://www.limitedliabilitycompanycenter.com/how_limited_is_limited_liability.html]

Every member who actively participates in the business of the LLC runs the risk that his action or inaction will result in personal liability. This is particularly a risk of a service business in which the members provide the key service. If you are an electrician and you leave an exposed wire that electrocutes someone, your LLC is not going to protect you.

Similarly, if you make promises about your product or service that are not true, the first claim may be against the LLC for breach of contract, but if the LLC cannot perform or pay damages, the injured party may come after you for fraud or a similar claim based upon your own action.

From an Arizona law firm:

[url]http://azcorporatelaw.com/entity-formation/tips-for-maximizing-the-protection-of-a-limited-liability-entity/

Negligence, Fraud, Illegal Conduct of a Member: One of the common misconceptions regarding forming an LLC for business purposes is that the LLC shields a member from personal liability arising from certain acts or omissions of the member. This misconception is particularly prevalent among professional service providers such as doctors, lawyers and accountants. For example, a surgeon’s patient may suffer a bad outcome and file a malpractice lawsuit naming the surgeon’s LLC, and the surgeon personally, as defendants. In this situation, the existence of the LLC will not protect the surgeon from personal liability if he is found to have committed malpractice. Individuals can always be held personally liable for negligent, fraudulent or illegal acts or omissions. Merely operating under the umbrella of an LLC does not change this rule.

In Texas:

[/url]http://www.baylor.edu/content/services/document.php/117969.pdf

"LLC members or managers are liable for their own fraudulent or tortious acts even if the acts are committed in the service of the LLC."

Another source:

[url]http://thellcexpert.com/llcanswers/how-does-a-limited-liability-company-provide-protection/

"Let me give you an example.  If you operate a grocery store business as a sole proprietorship and enter into a contract to purchase inventory, you are personally liable to pay for what is owed under that contract.  If instead, it is a limited liability company that is the business and enters into the contract, it is the LLC and not you personally who is obligated under that contract.
 
Another example:  If you own that store as a sole proprietorship and someone slips and falls and sues- you and all of your assets will be at risk for that lawsuit.  If it is the LLC that owns and runs the store, it it is the LLC and its assets that are at risk for the lawsuit.
 
So, given this litigious society where plaintiff lawyers are always looking for targets and people sue for almost everything, the benefits of limited liability protection from a limited liability company are so powerful. . . especially given the low costs to form and ease of maintenance.
 
Now, this protection is NOT ABSOLUTE.  If you are otherwise personally negligent or at fault due to some actions you personally did, then the limited liability company will not shield you from those actions even if you were working in your business at the time.  For example, if you were delivering groceries to a customer via a company truck and you were at fault in having an accident, you will be held personally responsible for being at fault.  So, having a limited liability company is not the substitute for getting business insurance covering your business and its employees."

Also, Florida is a state in which a creditor who gets a judgment against you can take your single-member llc in satisfaction of that judgment:

[url]http://www.keytlaw.com/azllclaw/asset-protection/single-member-llc/

Account Closed · Answer

If you are going to perform the property management personally, forming an LLC to be the property manager will not shield you from liability.  The tenant can and will sue you personally because you were the person who negligently failed to fix the slippery sidewalk or dangerous electrical issue.

Owning properties in an LLC may protect your from some liabilities, but again, if the plaintiff can show that your personal negligence led to his damages (or if he can pierce the veil of your llc), you will be held personally liable.  And in some states, a court can force the liquidation of your other single-member LLCs to pay off judgments against you.

This link has some good information about the limitations of the LLC:

http://www.limitedliabilitycompanycenter.com/how_limited_is_limited_liability.html

Don't rely on your LLCs for liability protection.  Get plenty of liability insurance.

Ken Latchers · Answer

I generally think that liability protection (in several directions) is a 4-legged stool:

- MORE than adequate insurance 
- Very well managed LLC
- Very well-detailed, lawyer approved lease/contracts with all tenants or workers
- do everything with integrity to the spirit and letter of the law.

Account Closed · Answer

Bienes and I may just be talking past each other at this point, but I want to be very clear for Delin and Nathan and anyone else reading this thread:

If you manage your own properties, you will not gain any liability protection by performing the property management under an LLC.  A tenant who is injured by your negligence will sue you personally - your LLC will not protect you.

Bienes Raices · Answer

^ Thanks for clearing that up Keith. I think I was misreading what Jon P. stated originally when I responded, and I jumped the gun in my post. This has been an interesting discussion.

Bienes Raices · Answer

__________________________________

Again, I have been told by two (reputable) lawyers who work in the asset protection and business law fields respectively that this is NOT true in my state.

I urge anyone here who is serious about this and has assets to protect to consult with a lawyer who practices in the state where the entity would be formed, then make up your mind. You don't have to use that lawyer if you decide to form an entity--you can do that online yourself or through a service, which should be cheaper. But this is one area where it's better to just bite the bullet and pay for professional advice.

Delin W. · Answer

Yes, thanks for the replies and clarifications. I have decided against creating the LLC for property management. It just doesn't offer any real protection against personal liability, as you all point out. I think that's the only place there is a potential vulnerability for us, but all investments come with some degree of risk I suppose. 
Thanks for all of your thoughtful advice. : )

Bienes Raices · Answer

Two different lawyers have told me the same thing here. The single member LLC issue affects the charging order protection, not lawsuits that arise from inside the business. The LLC's assets are at risk if you act negligently (and the judgement goes over the insurance limits), but the point is to create a firewall between the LLC and the rest of your assets so the creditor can't go after them. If all of your wealth is tied up in one LLC, however, that's a problem.

Bienes Raices · Answer

I was told by my lawyer that in Florida they can only pierce for fraud and misrepresentation (even if you are doing the management yourself). I agree that you shouldn't skimp on insurance, though, since they can go after the LLC after the maximum liability limit is reached on the insurance policy.

Owner as Property Manager... LLC for negligence liability?

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