I’m new to investing and was wondering what the advantage of an LLC?
Unless you have significant wealth outside of real estate holding AND plan to take no part in the management of the business, the LLC has no benefit to you.
The advantage of an LLC is in asset protection to segregate your business holdiongs from your personal holdings.
Keith
Keep in mind that an LLC set up exclusively to make it more difficult for judgment creditors or potential judgment creditor to collect is illegal and the structure will not be respected by the courts. Asset protection is never a reason to do any planning except for the few exemptions given to homesteads, certain retirement plans, and life insurance.
BLL,
Can you clarify your post for me?
I guess I understand that doing things SPECIFICALLY and EXCLUSIVELY to avoid the reach of creditors or to perhaps to avoid/evade taxes is illegal.
However, the #1 advantage of an LLC (as I understand it) is to “limit” one’s “liability” - as such, isn’t every LLC created (at least in part) to limit one’s liability to lawsuits, etc.?
Thanks for helping me understand.
B
hart,
The information floating around the Internet concerning LLCs is mostly wrong. They were not created so a business owner can isolate business assets from personal assets with respect to liability. Public policy has always been that people should be held responsible for their actions and that people should pay their debts. Anything done contrary to them is not accepted by courts. Gurus and promoters don’t talk about this because they can scare people into spending big money for these plans and are long gone when the plan fails. You won’t know your plan is crap until your assets are being seized. Luckily, it almost never gets to that point. Most cases are settled for the insurance limits. Judgments in excess of a few million dollars are rare.
LLCs were created as way for people to invest in businesses without putting their personal assets at risks and without burdening the business with excessive paperwork. They are a result of the unlimited liability of general partnerships and the onerous record keeping requirements of c-corps. They are means to invest with the limited liability of a c-corp and the informalities of a partnership. The limited liability is for the investors, not the managers or people who take an active role in managing the business.
They are not a means for a business owner to thwart collection of debt, which is how they are presented by promoters and gurus. If you decide to use one of the programs that splash “Bulletproof Your Assets” or “Protect Yourself from Judgments” on the cover, that material will be presented in court to prove your intent when setting up the structure was nothing more than attempt to prevent payment of a debt. The law is very clear that such actions are illegal. The more convoluted your set up looks, the more likely people will think you are up to no good. There must be a legitimate, business reason to justify what you did. Real asset protection planning doesn’t look like the obvious, in your face junk you will find most places. It is subtle, but has the effect of forcing a judgment creditor into accepting your terms of settlement.
For most people, LLCs do no good. With the exception of a personal residence, new investors have just about all their wealth tied to the business. The LLC can only protect the personal residence in this situation, but there’s no reason to use one when a homestead provides superior protection. How strong is this protection? No matter what OJ does, the Goldman’s will never see a dime from his home as long as it is his primary residence. He tried some fancy BS with that book deal and the Goldmans got it. If he manages to avoid jail from his latest stunt, all the memorabilia he collects will be given to the Goldmans. Statutory protections for a personal residence are truly bulletproof so much so that the law has changed because of what OJ was able to do.
Assuming the business owner does have assets beyond the home that reside outside the business, the LLC isn’t going to protect them because the owner is most likely managing the business himself and will get sued personally as the individual who caused the injury. The LLC is irrelevant. The judgment will be against the individual and his personal assets will be used to pay the judgment. Since the LLC will be held equally liable, its assets will also be liquidated.
Not at all. I don’t know any legitimate planners who have set up an LLC for limited liability. I have seen them used for estate planning, capital segregation, business continuity, exit strategies, ease of recording keeping, and several other reason but never for limiting liability. The limited liability just happens to be a side effect of the way they were set up what, but they were not set up in whole or in part to limit liability from lawsuits, except for the members who take no part in the management of the LLC.
BLL,
Thanks for the thoughtful/complete response. I’ve never attended (nor would consider attending) the kind of seminar you mentioned, but I definitely didn’t have a complete/accurate picture of the real purpose/intent of LLCs.
For argument sake, if an individual owns (for example) six apartment buildings/investment properties - and personally manages them; there’s no real reason to own those properties in separate LLCs - assuming the owner has proper insurance - and possibly his/her own personal residence protected in some way? If that owner was sued, would the assets in the other LLCs possibly be targeted as well?
Thanks again.
Yes. If the owner/manager is sued and loses, then all his personal assets (e. g. the LLC membership interests) can be used to satisfy the judgment. A properly structured operating agreement can limit the creditor to just a charging order and he will have to wait for the LLC to decide to pay him, which will be never if I had anything to say about. It is highly unlikely you will find such an operating agreement from a low cost vendor.
You are starting to get into advanced planning. It is quite possible to personally manage an LLC or a business and protect the business assets and personal assets from judgment creditors, but it is a matter beyond of the scope of the guru promoter who hawks his stuff at conventions. Most people will find the recording keeping requirements to be more trouble than it is worth. These kinds of structures live and die by the way they are maintained.
I say LLCs won’t help most people because they rarely own much beyond the business assets, manage the business personally, won’t spend the time and money to properly maintain the structure, and don’t want to pay for a complete plan. In the end, they get the same benefits as carrying sufficient insurance. If you are talking about millions of dollars, then advanced planning is required, but for the newbies, the last thing they need to consider is an LLC. They should spend their energy and resources building the business.
there's no real reason to own those properties in separate LLCs
untrue. there are MANY reasons why it is desirable to own properties inside an LLC: tax benefits, ease of transition of the death estate, and should you later determine that you don’t have time to manage the properties yourself, you will achieve level of asset protection that is not available to owner/managers. It’s much more difficult to establish the structure at a later date.
I ALWAYS recommend that investment property be held inside an LLC. The fact that asset protection is limited TODAY does not make it a bad decision.
Better to make a good decision for the wrong reasons than a bad decision for the right reasons. It’s cheap. Easy to maintain. And provides the infrastructure for operating the business that works today and tomorrow.
Mark,
Would you recommend owning EACH investment property in a different LLC? While the cost of establishing different LLCs isn’t much, there are increased banking costs (i.e. multiple accounts), “business entity tax”, bookkeeping time/effort, accounting costs, etc. Are the liability and other benefits enough to offset - assuming that there’s sufficient liability insurance coverage in place to begin with?
Thanks.
If the same owners own the LLCs, then they get merged together. One of the better solutions is to have a non-liability generating entity own the LLCs and manage them through another. There are also clauses that can be added tot he operating agreement to ensure charging order protection will apply in all situations, including bankruptcy.
You are getting into advanced planning techniques that are best handled by an expert who actually drafts and defends these structures as opposed to using a document mill whose attorneys have never stepped foot in a court room or give everyone the same document. You also need to run everything past a tax expert like Mark, who understands the tax consequences very well and has a grasp of the liability issues involved.
right. if you are at the point where such questions are a serious concern for you, it’s time for you to get your financial team in place and develop a solution for your personal circumstances including: estate planning, tax planning, insurance, retirement, etc.