LLC Protection Questioned

[David Ferreras]

In the slip and fall scenario, where the renter slips and falls on your property causing them to pursue legal action against you, what is to stop them from suing the business (the LLC) and you (as a negligent landlord)? Wouldn't this defeat the protection purpose of the LLC that I seem to read about everywhere?

I am about to market my first rental and am in the process of opening an LLC. I plan to put that property in there to separate it from my personal assets and all of a sudden I thought of the scenario above? Any thoughts? Am I thinking about this the incorrectly? The property and the LLC that will eventually own it are in North Carolina.

Thanks in advance.

[Marcus Auerbach]

@David Ferreras you are asking the right questions! North Carolina may have different State laws than Wisconsin, but the gernal principles should be the same. The protection an LLC offers is often misunderstood by new investors. It does not stop anyone from comming after you, but it limits your liability to the assets within the LLC. This is becomming an issue when your net worth is increasing and makes you a million dollar target.

You actually have several layer's of protection before you get to your entity.

First, run a good business. You can get sued for anything in the US in theory, but if you manage your property professional and keep it in good repair and safe, your chances of getting sued go down dramatically for 2 reasons: #1 your tenant does not hate you, #2 there is no good case for an attorney to take on. 

If it still happens, your landlord property insurance should cover it - if it was an accident and not your fault. The liability usually has a limit of a couple hundred thousand dollars. That covers most slip and fall cases. 

Next, you can also get an umbrella insurance, both personal and commercial, they will cover anything in excess of your regular insurance up to a million or two. It is very cheap, because the risk is very low. Chances are a slip and fall will cost less then 2 million - even if a judge finds you at fault (remember, your property is up to code, you have handrails at the stairs, you have a snow/ice service etc) 

Also, you are leveraged, so you don't have a whole lot of equity/net worth to come after, which makes it less attractive for an attorney to take on a lot of work, for maybe a little payday.

If all that is not enough, set up an LLC - it acts like a firewall if done correctly and contains the financial damage within the entity.

The other way round, here is what NOT to do: own a 3 million dollar appartment building free and clear so it's pure equity to go after, in run down condition, with burnt out lights and broken handrails on an icy winter day and nobody comes to salt, next you forget to pay your insurance and of course you don't have an umbrella policy. Your tenants also despise you, because you always increase the rent, while never repairing a thing. When you show up, you usually come either in a yellow Ferrari and make burn out's on the parking lot or in a Bentley with a driver. And of course you own the building in your personal name and it says it right on the sign: Junkview Appartments. Owner: David Ferraras.

LOL. Sorry, got carried away ;-)

Watch Brandon Turner's vieo on LLC on YouTube, you will better understand the pros and cons. And of course I am not an attoryney and this is not legal advise, just my amateur opinion ;-)