All Forum Posts by: Ryan Fox

@Account Closed- Having an operating agreement helps strengthen the limited liability of the LLC. It's a "corporate record" that will often explain that the LLC offers limited liability to the member(s) and that it was created for that purpose. An operating agreement offers additional benefits if there are multiple members of the LLC.

Taxes are not really my area, so maybe other qualified individuals can take a stab at those questions.

Does transferring ownership (selling the LLC with the property in it) by LLC violate the Due on Sale clause on the mortgage? This assumes that title was already in the name of the LLC. I can't really assume I know the language of any due on sale clause out there. All due on sale clauses can be phrased differently. A due on sale clause for a DSCR loan is going to be different than a DOS clause for a conventional mortgage. It's going to depend on the particular language of the DOS clause. There may be other clauses in the loan documents that are violated in this scenario.

*This is for informational purposes only.  It is not intended as legal advice.  It does not create an attorney-client relationship.  

@Timothy Galligan Section 8 works well in the Chicago market.  I recommend GC Realty & Development as a property manager if you want to pursue that market.  

There seems to be a lot of confusion on BP as to how you lose the protections of an LLC or business entity. In legal terms, this is called "piercing the corporate veil." A business entity can shield you from liabilities and debts. However, I wanted to explain specifically how veil piercing works in California so it doesn't happen to you.

Let's say you have a California investor who has a California LLC. The LLC gets sued. Can the plaintiff pierce the veil of the LLC and hold the investor personally liable? In order for the plaintiff to do that, the plaintiff must prove two things:

• there must be a unity of interest and ownership such that the separate personalities of the entity and the owner no longer exists; and
• an inequitable result will follow if the acts are treated as those of the entity alone.

Unity of Interest and Ownership

These are factors the plaintiff could use to show a unity of interest and ownership exists:

• one individual's ownership of the entire entity;
• use of the same office or business location by the LLC and owner;
• commingling of funds and other assets of the owner and the entity;
• an individual holding out that he / she is personally liable for debts of the corporation;
• failure to maintain minutes or adequate corporate records;
• disregard of corporate formalities;
• absence of corporate assets and inadequate capitalization; and
• the use of an entity as a mere shell, instrumentality or conduit for the business of an individual.

Importantly, no single one of these factors is determinative, but the court must examine all the circumstances to determine whether the “unity of interest” test is met.

Inequitable Result

The test for this requirement is simply that an inequitable or unjust result would take place if the corporate protection is honored.

Note: the above analysis pertains only to California.  That's where I've litigated cases about veil piercing and that's what I'm familiar with.  The standard may be different in other states.

I’m happy to answer any questions you may have on this topic.

*This is meant for informational purposes only.  It is not legal advice.  It does not create an attorney-client relationship.

@Molly Watson- Thank you for sharing.  A couple things I'd like to point out:

1) Veil piercing is an extremely complicated subject that varies from state to state. Activities that would cause the protection of an LLC to be pierced may be different from state to state, so the best type of attorney to consult with is a civil litigation attorney in your state who's already litigated these issues.

2) LLCs offer varying degrees of protection depending on what state they're from and whether they're single member / multi-member.  

3) An often-overlooked benefit of an LLC, or any business entity for that matter, is the ability to have the business entity file for bankruptcy. This would be a last resort for the business entity but could possibly be done without you having to file a personal bankruptcy. So you would be able to maintain your credit score while a foreclosure is delayed or eliminated altogether.

*This is not a comprehensive list of all considerations regarding creating an LLC. It is not meant as legal advice. It is for informational purposes only.
 

@Mehdi Haider- Check out Kerry Baird's post on this thread: https://www.biggerpockets.com/forums/50/topics/598663-heloc-...

@George Callicoatte- Make sure you have enough cash before you make the next purchase. Cash is the lifeblood that will allow your rentals to survive. However, there wouldn't be anything wrong with looking at this point into getting a HELOC on one of your existing rentals. Some banks do them, not many.

@Raul Sai P- Sorry this is happening to you.  I've got 24 units in the KC area and have only had 2 really bad tenants (knock on wood).  However, one of my property managers is saying they're seeing more of this - tenants wrecking every property.  Most property managers in the area are just not good I've come to find.  I'll DM you my recommendations for PMs.  

I made a private loan to a borrower secured by a deed of trust. The borrower is now refinancing. Is it customary for me to draft the release of DOT (sometimes called a "deed of release") or does title usually prepare that, or is there really no custom? Thanks in advance

@Myriam Keaton- You may need to be licensed in CA to do this loan.  I have referrals to attorneys who can break this down for you and provide all the loan docs you need, if you're interested.

@Mike Hern- I don't practice in non-community property states so I can't really comment.