LLCs are not the magical barrier to personal lawsuits that many believe. The same is true for closely held corporations. There seems to be a common misconception that putting REIs into one or more LLCs will protect the personal owner from being sued. This is not true. Although an LLC can provide protection from a personal lawsuit, it will only do so if the LLC members consistently adhere to all of the requirements.

Nothing herein is legal advice.

For many decades, courts have allowed creditors of a corporation to recover judgments from the personal assets and wealth of the corporations' shareholders. This is commonly referred to as "piercing the corporate veil." The same doctrine applies to LLCs to allow creditors of an LLC to recover judgments from the personal assets of the LLCs' members.

Without digging into the many nuances of the doctrine, in CA, there are 23 factors that the courts look at to pierce the corporate veil, and support a finding that the individual owners are personally liable for the corporate debts. Although CA does not yet have a lot of case law applying the same factors to LLCs, it is reasonable to believe that most courts will apply the same factors to LLCs. Because piercing the LLC veil is an "equitable remedy," even if you are not located in CA, your local courts will likely look to a similar set of factors.

1. Commingling of funds and assets.

2. Failure to segregate funds.

3. Diversion of funds or assets.

4. Treatment by shareholder of corporate assets as own.

5. Failure to maintain minutes.

6. Identical equitable ownership in two entities.

7. Officers and directors of one entity same as controlled corporation.

8. Use of the same office or business location.

9. Employment of same employees.

10. Total absence of corporate assets.

11. Under-capitalization.

12. Use of Corporation as mere shell.

13. Instrumentality or conduit for single venture of another corporation.

14. Concealment or misrepresentation of the responsible ownership, management and financial interests.

15. Concealment or misrepresentation of personal business activities.

16. Disregard of legal formalities.

17. Failure to maintain arm’s length relationships among related equities.

18. The use of the corporate identity to procure labor, services or merchandise for another entity.

19. The diversion of assets from a corporation by or to a stockholder or other person or entity to the detriment of creditors.

20. The manipulation of corporate assets and liabilities in entities so as to concentrate the assets in one and the liabilities in another.

21. The contracting with another with the intent to avoid performance by use of the corporation entity as a shield against personal liability.

22. The use of the corporation as subterfuge for illegal transactions.

23. The formation and use of a corporation to transfer to it the existing liability.

Although not common, under the right circumstances, one single factor from the above list, might be sufficient for a court to rule in favor of piercing the LLC veil. In no situation does the court have to find a violation of all factors. The court only need find enough factors to compel the court to conclude that personal assets should be held accountable for the damages. (Think: "Woke Judge" who hates landlords.) For those who adopt multiple LLCs with one LLC holding each separate REI, you have probably already ticked-off factors 6, 7, 8, 9 and possibly 17 and 18. For those who regularly remove equity from the LLC by refinancing, or buy REIs with little or nothing down, you have probably also ticked-off 11 and 19.

Two things to keep in mind if you are attempting to use LLCs to shield your personal assets from creditors. (1) Adhere to the rules and avoid as many of the above factors as possible. (2) Make sure the LLC(s) purchase as much insurance as can reasonably be afforded. If there are sufficient insurance proceeds available to pay a judgment creditor, there is little reason for an attorney (or court) to attempt to pierce the LLC veil.

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