Regarding this issue of being sued personally, along with your LLC, if you’re managing the property yourself instead of a PM (I’m still confused by this because the attorney I paid to see said this couldn’t happen, but whatever…)
Does this have anything to do with whether it’s a single member or multi-member LLC, or is anyone who manages the property themselves at risk?
Here is the very simple simple rule for liability no matter the situation. If your personal action or legally required action that you failed to take causes an injury, you are personally responsible. If you “fix” a heating system that leaks and the tenants get sick, you are responsible. If you fail to fix the broken stairs and the tenant gets injured, you are responsible. Given that, you can see why an LLC doesn’t protect the typical investors who does all his own work. Any injury is most likely caused by the individual and thus the individual is personally responsible. The LLC limit anything.
This lawyer doesn’t sound like he has much experience. It is very common when suing small companies to sue the owners and managers individually, especially when they are the same group of people.
My frustration is that I’ve now spoken to two lawyers, one who charge d a lot, the other not much at all, and I also spoke to a friend who happens to be a lawyer, and I still don’t have the perfect answer of what to do. That’s why I’m perpetually on this board. :rolleyes
I’m not used to a subject matter that has so many gray areas.
I did go to that other forum that you mentioned and they were helpful. I’m beginning to think just go with high levels of liability insurance and no entity, do that for a couple of years, make sure I want to stay in the rental business for the long haul, and then consider a more sophisticated strategy. My time could be better spent going back to learning about the rental business than spending any more time learning about AP right now.
For what it is worth, my attorney agrees with BLL. I outsource property management. Even though my wife and I have a seven figure net worth, ,my attorney does not feel I need an LLC. He says that good and fair business practices and adequate liability insurance is all I really need.
He also says that in his considerable years of experience, he has only seen two landlords sued here in my area of SC (apparently SC is not a very litigous state). Both involved bodily injury attributed to construction defects and were settled out of court by the insurance companies.
My attorney wants me to use trusts rather than LLCs for estate planning and probate avoidance.
There is no perfect answer because everyone is different. What I typically tell people is to have your local family attorney and tax expert who understand your situation hire one of the national planners to devise a plan for you. Your experts know your situation. The planner knows the big picture. Together they draft something specific to you that meets your needs
I’m not talking about some guru at a real estate convention. I mean a planner who actually knows what Heckerling is and has actually attacked or defended plans in court. I mean someone on the level of Jay Adkisson who actually testifies before Congress or a person like Steve Oshin who actually wrote Nevada’s new law on LLCs (I’d like to hear how the DIY continent plans to update their LLCs based on this new law). Hiring these folks will cost somewhere in the 15-100K range depending on your net worth. That isn’t an option for the typical investor with a net worth under a few million as it’s just too expensive. If that’s the case, good business practices and insurance will protect you like Dave says. Taxes are your real enemy and that’s where you should devote your time. At $5-10M, that’s when you need advanced planning and the planning is still more about minimizing taxes than protecting from lawsuits. Liability protection happens to be a side effect of good planning.
This is my frustration as well. I paid for a lawyer (who is also a CPA and RE Investor) to recommend that I have a couple of separate LLCs, then another Master LLC to manage everything.
After reading these boards, I think a combination of non-negligence, insurance, equity stripping, common sense, and possibly Land Trusts may be a better combination for many of us.
OGibson, I was advised something similar by the attorney I visited, have one LLC that funds other LLCs. It made me uneasy though because I don’t understand all the ramifications of doing that. Other attorneys have told me not bother with a complex and expensive arrangement like that. As BLL stated, spending thousands at this stage is not cost effective for most people (i.e. myself)
I think your ideas are right about non-negligence. I’m not an attorney though and your attorney’s plan may make sense. As has been mentioned on here it depends on your net worth. I do have some assets I want to protect but its definitely not 7 figures worth, let alone 2-5 million!
Was the idea of the “master” LLC to make the administrative tasks less burdensome?
I just thought of a possible scenario where a self-managed LLC could be more dangerous than owning properties in your own name:
Suppose your managing the property yourself and tenant/lawyer decide to sue you individually for something–the liability insurance you have on the house within the LLC would be useless for that, and your personal umbrella insurance that you have on yourself outside the LLC wouldn’t cover you for some incident that happened at the rental house. You’d be screwed!
Am I right?
Whereas if you own the property in your own name the liability insurance you have as a part of your dwelling fire policy should cover you.