Several posts have discussed the lawsuit liability protection or lack there of from a LLC when it comes to real estate. I thought of two posssible scenarios and I’m wondering if either would give you the protection that people are seeking thru a LLC.
Scenario 1 - you create two LLC’s and the second acts as your property management company thusly relieving the owning LLC from rental liabilty. I’m not sure though if one can create a property management LLC without it holding an actual property management license in your state. I know you can manage your own property, but by doing that thru a LLC are you defacto creating the same liabilty issues as previously discussed.
Scenario 2 - you create two LLC’s and the owning LLC subleases the property to the second LLC. The second LLC is the entity that actually deals with the general public with renting the property. Thusly if the second LLC has the same rental liability issues previously discussed and are subsequently sued they in fact have no assets to be sued for. I would imagine though that a contract between the two entities for the sublease and payments (and different bank accounts with actual money transferred) would need to be documented to show the actual separation of funds / entities.
In either scenario, would you being a manager / managing member for both entities automatically create the lack of separation that is so highly sought after?
Can anyone give guidance if these seem plausible … thanks in advance
Your “property mangement” LLC would have to be a legitimate property management company, licensed and everything. Not all states will allow you to license a corporation - must be a human individual. Either way, since it’s still essentially you who is managing the property, the LLC would provide no shield from liability.
Also, the time and money is would take to set up and maintain such a structure may not be less expensive than just contracting a property manager in the first place. You’d have to really flush out the numbers.
Although layering of corporate entities have proven to “deter” or complicate tort suits, it’s still no guarantee and may cost you as much as defending yourself. Remember plaintiffs’ lawyers will pursue you on a contingency basis and will more likely do so if you have significant assets or equity to collect. If you are leveraged, then your equity is all you need to protect. The cost of complex corporate structuring must be in balance with how much equity you have exposed. Otherwise you are spending more than you need to on corporate entities for asset protection.
Dealhunter you make a valid point on both issues. I thought the individual property management LLC would have to be licensed as well so that does not seem to be an easy fix.
The second option does appear to be somewhat viable, but the cost incurred to set up two LLC’s, two bank accounts and the time required manage / document the two may outway the benefits.
I feel this second option does become more attractive as you acquire more properties though. If you own 20 rentals and you are paying 7% to a property manager and lets estimate that your average rent is $700. That’s almost $1000 dollars a month ($12,000 a year) you are shelling out to a PM company. That’s definately not peanuts and in Florida it only costs about $150 a year to establish a LLC. Now you may not want to deal with the hassle of managing 20 properties yourself, but if you do then a $12,000 dollar gain does seem like good investment for a $150 cost.
Flushing out the numbers on each deal is a good start. I happen to have over 20 rentals in my portfolio and all have titles listed under various LP’s (Limited Partnerships). I have an LLC, but I use it only when I’m about to sell a property, otherwise I hold all my rentals under an LP. I also use a separate property management company for ALL the rentals. I have equity in all of them and a couple are paid in full, so the use of both the LP and property manager is to protect that equity stake in my properties.
but you (personally) are managing the properties on behalf of the management co. You (personally) sign the leases, you (personally) sign the contracts with vendors. You (personally) make the day to day business decisions.
You (personally) will be sued if Sally Slipnfall steps on that loose board you haven’t arranged to get repaired yet. Your personal assets will be exposed, and that includes corporate stock you own. Your interest in the LLC may or may not be exposed depending on state law. In TX you should have charging order protection, but your mileage may vary.
[disclaimer] I an not an atty and am not licensed to practice law. [/disclaimer]
Why, if the LLC is considered a Charging Order Protected Entity, under the Uniform Limited Liability Company Act, AND the business of the LLC is conducted property (not simply an alter ego of the owner, no co-mingling, is adequately capitalized, and not used to perpetrate a fraud) is the owner not protected from outside liability. I understand how a SMLLC will not be protected from inside liability in the way a MMLLC/LP is protected.
If, as BLL and other hypothesis, the owner is not protected from outside liability in a properly structured and run SMLLC, what was the purpose of the legislation creating these entities?
I’ve spoken with 2 different lawyers, both specializing in real estate (with one further specialization in asset protection). Both have stated a properly structured and run SMLLC will protect the owner from outside liabilities. It would be up to the attacker to prove the entity is not property structured or run to “pierce the corporate veil”.
I’m not trolling here, I really want to know why there is so little trust in the LLC structure in protecting the owner. Both lawyers I’ve talked to have stated that although most suits will include the owner personally, they are typically dismissed as having no standing.
The issue isn’t structure. It’s personal liability. If you are the LLC manager/employee/agent who built a deck that collapsed and caused an injury, then you are personally responsible and your personal assets can be used to satisfy the judgment. Acting in the name of the LLC does not absolve you of your personal responsibility for your own actions. LLCs and COPEs work, but only as part of a comprehensive plan, not as the end-all-be-all presented by gurus.
LLCs and limited liability exist to protect owners and investors, not those who actively participate in the business.
Exactly. That is why I use property managment even though all my rentals are titled under an LP. I do not sign leases. The prop manager simply faxes me the rental aps and I say yes or no to the applicant. The property manager deals directly with the renters including all correspondence and contracts needed.
In addition, my personal assets are titled to other entites/trusts rather than myself directly. While this sounds like a lot, it is necessary to protect my investments and assets from liability, tort suits and taxes. Each person has to DO THE NUMBERS on your holdings. Equity, cash and other liquid assets are what can be taken in a suit and depending on how much you have to protect, you spend and set up the structure accordingly.
Most people starting out in RE business are highly leveraged, so the amount of equity you need to protect should be compared to the amount of time and resources it will take to set up complex entity structures. In most cases, you don’t need that much structuring at the start.