What protection LLC offers exactly, Attorney disagreed? what is the code for wiring under Crawlspace

Question

I am new to real estate. it is my first flip project. I have two questions hoping you as experienced investors could point me to right direction.

1) I just talked to several real estate attorney and accountants. I have been told that LLC will not have much benefits as I was thinking it would. Attorney said it would mainly protect from Debt or general liability, not much from any issues which the buyer would sue after closing such as non-disclosure or home defects. I mainly concern about being sued after I sold the properties due to I am a newbie and does not know much about construction. He suggested I bought a better insurance instead of forming an LLC.
The CPAs I talked to mentioned it would not offer benefit with LLC due to it needs to be maintained paying $800 fee plus a tax of percentage of "Gross sale"(in this case total dollar amount of the property sold for, not profit I made on the sale), he said it's roughly $2500 for $500k property. This is the additional Tax only for California on top on the state tax.

2)on my current project, the contractor putting new electric wires at the crawlspace. However he didn't drill holes to run the wires through. instead he running wires at the bottom of the joists. Is it up to code or does it need to run through the joist with some holes?

Jon Holdman · Answer

Did you get a permit and inspections for the electrical work? Is the electrician licensed? If it was permitted and inspected, you're fine. If you're not confident about your ability to do the rehab correctly, hire a general contractor, licensed subs, and get permits for everything.

John Mireles · Answer

An LLC is just a legal form used to organize your business. Unlike a sole proprietorship, it's not you actually conducting business, it's the LLC. So if there's a lawsuit, it's the LLC that is on the hook, not you personally. Now there's ways to get around this and you can bet that a plaintiff's attorney will try every trick in the book. Gross Negligence and Fraud on the part of the LLC owner are two such ways. So in the case of nondisclosure, the question becomes one of did you forget to disclose or not know about the situation? or did you actually know about the situation but take steps to hide it from the seller? The first case would be simple negligence and thus not trigger a piercing of the LLC. The second case would likely be considered fraud - which would then put your personal assets at risk. Keep in mind that plaintiff's attorneys don't play nice. They will always include causes of action and allegations so that, if a judgment is made in their favor, they will put the LLC owner personally on the hook. There's no absolutes in this business. LLC is a just another layer of protection that may or may not be helpful. If you have no assets to protect, then an LLC may not mean that much to you. As your net worth grows, it definitely becomes something to consider.

Michael Galloway · Answer

Nate, welcome to BP. I do a lot of rehabs in northern california. For me the choice of getting an LLC was for 2 reasons... 1) you do not have to fill out a Form 593-E, Real Estate Withholding – Computation of Estimated Gain or Loss at closing time. The government is always ready to get paid, (you hopefully made a profit and they want there share) with an LLC you do not pay any taxes until you file. i use this money that would normally go to the government, to reinvest in the next project. More capital = more projects or larger projects 2) It is one more barrier to shelter personal risk, Case in Point, i picked up a property at trustee sale and recorded the deed as usual, Did not do an eviction because property was obviously abandoned. (pictures to prove it in Arbitration) Started my rehab. X owners moves back in and says shes was on vacation. I call the police. Filled out report. Officer and her agree she will move to her mom's house, i give her several hours to move her stuff. long story short 3 months later i sell the house and make a profit. Then i get served with a lawsuit for $500k. - Claiming wrongful eviction, amongst other things. My insurance policy is a fire an casualty policy, that DOESNT cover wrongful evictions etc. The insurance company ended up giving me a defense attorney, but would not cover any liability. I Hired my own attorney as well. (insurance attorneys are not on your side, they are on the Insurance companies side);) Amongst pressure from Insurance company lawyer, Arbitrator, and Plaintiffs attorneys to settle, my attorney i hired told me to Stonewall the plaintiff, balls to the wall (sorry ladies) as a last resort. we threatened to bankrupt the LLC., Point is: LLC was used as a heavy bargaining chip for the settlement that was reached. Yes i know this is a crazy example and you never think it will happen to you, until it does. My advice, if you are going to be doing a lot of business, get the LLC. It could put a little more capital in your game and be that one bargaining chip to insulate your from risk when everything else has failed. Michael

J Scott · Answer

Depends on what you mean by "non-disclosures?" Is there an adverse condition that you know about but don't disclose? Or is the condition not disclosed because you don't know about it? Should you have known about it? Again, I'm not an attorney, but for gross negligence to be declared, you'd probably have to either have known about the problem but purposefully not disclosed, or it would have been a problem that any reasonable person should have known about that you didn't disclose. If there is something that you couldn't have reasonably known about -- and that's why you didn't disclose -- you're probably pretty safe. Assuming you can prove that's the case.

J Scott · Answer

Yes, thank you for the correction!

Nate Wong · Answer

I see most cases seller being sued for non disclosure only. If llc won't offer that protection as my real estate attorney suggested, its better off buying better insurance coverage and also have the contractor list my name on his liability insurance.?

Nate Wong · Answer

The contractor Is Licenced and the work with permit. However the city inspector would not go under the crawlspce to inspect the work. I want to make sure the contractor not cutting corner and the work performed up to code.

Nate Wong · Answer

Does the LLC protect the seller from non-disclosures? Recently my investor friend being for water intrusion to the garage which he has no knowalege of.

John Mireles · Answer

Simple negligence is not sufficient to open an LLC member to liability. Virtually all claims for damages will include negligence so if that were the case, there would be no point to LLC's. What's necessary (with regard to the tort of negligence) is Gross Negligence which is a wanton disregard for the safety and care of others. Basically, it's creating a situation where you know that someone is going to get hurt. Driving your car on a sidewalk or playing with fireworks in the middle of the crowd are two examples that come to mind. In a home transaction, you might be found grossly negligent if your contractor told you what the code was for wiring under the house and the fact that doing it another way might start a fire but you go ahead and do it another way to save money. If the house then catches fire, you can bet that Gross Negligence will listed as a cause of action on the lawsuit.

Jon Holdman · Answer

Licensed contractor? Permitted and inspected work? Because if you're trying to fly under the radar and avoid permits and building inspectors and using unlicensed contractors for electric and plumbing work, then don't bother worrying about liability. If the insurance company figure out you did unpermitted work and can blame that for your claim, they will deny you claim.