Business entities and insurance

[Kyle Soderman]

I had just finished reading a post that was linked to the ultimate guide to real estate investing ( http://www.biggerpockets.com/renewsblog/2009/03/18... ). The post talked about how you should have a business entity (lets say an LLC) and also insurance to protect your personnel assets from any claims resulting from a mishap at one of your properties.

Lets create a fact pattern, bare with me. John owns an LLC with 4 properties (properties A, B, C, and D) under the LLCs name. John has the proper insurances and the LLC was properly formed with all the correct paperwork. A railing on the stairs breaks in property-A. Tenant-Jill files a lawsuit against the company because the broken railing caused Tenant-Jill to break her arm. The claim ends up exceeding the insurance coverage.

My questions are:

1. Are properties B, C, and D at risk because of Tenant-Jills claim?

2. If they are at risk, is it viable to make multiple LLCs to separate your assets? For example; have properties A and B under LLC-1 and properties C and D under LLC-2.

Any help is greatly appreciated! Thanks in advance. 

[Hattie Dizmond]

Kyle...Any assets held by the LLC can be at risk, if the LLC is sued. The LLC protects your personal assets, assuming you have not "knowingly or willingly" engaged in any sort of illegal activities, which would result in "piercing the corporate veil". However, you can use a Series LLC to avoid that issue. A Series LLC creates separate entities within an LLC, each being a separate "Series". Each individual series, as long as assets are clearly tracked and attributed to that Series, conducts business fully independently. As such, each Series can contract, sue & be sued, without jeopardizing the assets of the parent LLC or any other Series. Currently, MN doesn't allow Series LLC's, but they do recognize Series LLC's formed in other states. Many companies incorporate and form Series LLC in either NV or TX, because of the protections provided in those states and the low taxation on entities. Here's a link to some info on Series LLC's in MN...

http://thompsonhall.com/business/formation/limited-liability-company-llc/series-llc/

Also, as you proceed and grow your portfolio, you should talk to a good estate planning attorney to maximize your asset protection. Long term, you're probably not going to want to hold assets in either your name or the name of the LLC. You're going to want to leverage some blind trusts as well as likely using a 2 LLC structure.

This is a great site for information on asset protection specifically around REI...

http://www.lonestarlandlaw.com/