This is for the other people who read this post and not the OP. I want to clarify a few points for you to consider when deciding to use an LLC.
Asking a real estate attorney about an LLC is like asking a podiatrist about cancer treatment. He may be legally qualified to treat cancer, but he isn’t a specialist, doesn’t keep up with the latest trends in oncology, and doesn’t have much experience in that area. The law is the same way, except it’s worse. Laws vary from state to state and what works in one may not work in another. At least medical treatment is not location dependent.
LLCs are business entities that have nothing to do with real estate. Setting up a proper LLC is done by an attorney who understands corporate governance and entity structuring and has experience with debtor/creditor law. There are also estate planning and tax concerns among a host of other issues, but a competent attorney will work in conjunction with other specialists as needed. Real estate attorneys are qualified to draft the deed to transfer property into an LLC and advise on matters regarding title. They don’t litigate liability.
For $300, you are getting a cookie cutter operating agreement instead of a customized document specific to your individual situation. Most, if not all, of these types of agreements lack current information because they are not updated frequently. In fact, the attorneys and gurus who sell them don’t even bother to update themselves most times. An LLC is nothing more than easy money to them. Bang them out for a few hundred a pop and you can really supplement your practice. The best part is that the client won’t come back since there is never an issue or insurance settles if there is. In the case of an excessive judgment, the cost to defend the LLC is upwards of $50K and the typical investor doesn’t have the resources to fight. He will just go into BK, either voluntary or involuntary.
Here is the worse provision I have seen in a low cost LLC operating agreement. It requires the LLC to distribute funds when possible. That has the effect of guaranteeing a creditor with a charging order will get paid. There is no charging order protection when avoiding distributions is not allowed by the operating agreement. A competent attorney would never include that type of language.
There is no charging order protection unless the LLC requires material support from the members. That means your partner’s creditor can become your business partner when he forecloses on your partner’s interest rather than settle for a charging order. If there is no partner, he can take your place and liquidate the LLC to pay the judgment.
Creditors aren’t stupid and are creating ways to force a settlement when they can’t pierce the LLC. The current favorite is a charging order with new provisions.
The LLC can’t distribute money to anyone.
The LLC can’t sell major assets.
The LLC can’t buy majory assets.
A receiver is put in charge of the LLC. Some receivers charge upwards of $600 to manage the LLC. How long can you operate under these circumstances?
Even with solid LLC practices and few LLC assets to pay a judgment, creditors can get paid by arguing any money taken out of an LLC by a member is a fraudulent transfer and ask the judge to order it back into the LLC to pay the debt.
The most important thing to remember is that you are always personally responsible for your own actions regardless if you are acting on behalf of the LLC or not. An LLC doesn’t protect you if your action or inaction caused an injury. You are personally responsible and your personal assets can be used to pay any judgment. It doesn’t matter if you acted on behalf of an LLC or not. It is not a consideration. You are personally responsible because you caused the injury. The LLC is responsible because you were acting on its behalf. If you are going to actively manage the business, use another vehicle to own your personal assets.
Don’t forget the operating expenses. There is the registered agent fee and the annual fee. States are starting to require a business license and charge an additional fee. You’ll need to pay for tax preparation each year unless you understand the tax implications of an LLC. In most states, an LLC must be represented by an attorney in court, even for simple matters. These funds are better spent growing a business when insurance provides enough protection.
For an LLC to be needed, the creditor would have to refuse to settle for the insurance limits and to get a judgment that high you would need to do something really stupid or get the jury to hate you. Most cases settle for the insurance limits before trial is even a consideration.