Posted by chet on February 04, 2005 at 19:31:16:
Did he say what he based this on?
It’s hard to pierce an entity, if the entity has ben operated properly (e.g. no co-mingling of funds, filed all your returns and state filings, etc).
Is an LLC worthless? - Posted by Gary
Posted by Gary on February 04, 2005 at 10:17:52:
Hi,
We are long time re investors who have always had an LLC for our re investments; the LLC is CT registered. Thankfully, we have not run into any major legal issues nor have we been sued. Primarily the LLC has been a useful accounting tool for us.
This year, we have sold three of our properties and, using a 1031 exchange, purchased one somewhat run-down property that is on a major lake in CT. This property will be a rental residence, at least for one year. The value (and potential value) is so great that we thought we would create a LLC for just that property. We are especially concerned that someone may have a boating accident, or fall off the deep dock on the property. We thought we would create a Nevada LLC for greater protection.
When we spoke to our attorney, however, he said that “piercing the veil” is relatively easy for our existing LLC. He said that a Nevada LLC would make piercing the veil a little more difficult, but certainly not impossible. In general, he thought that the LLC is basically not worth very much in terms of protection.
He recommended instead that we have more than average insurance, and make sure that our property is well maintained. He said that a lawsuit that goes beyond our insurance protection would probably make history for decades to come in CT.
Do you have any thoughts on this? Thanks!
LLC NOT worthless - Posted by John Merchant
Posted by John Merchant on February 07, 2005 at 19:50:10:
I got sued a few years back for an alleged injury said to have happened on a property of mine, and it concerned me enough to hire another lawyer to defend the suit for me.
My lawyer’s formal court Answer included the fact that the property was owned and managed by an LLC, which it was, and that allegation, together with other defenses he thought I had, was instrumental in getting the suit dismissed soon after.
The other lawyer was visualizing stony ground instead of verdant pastures full of money, and trust me, that is very discouraging for any plaintiff’s lawyer.
Remember, unless there’s openly known insurance in sight, the plaintiff’s lawyer is going to demand cash fees and costs to pursue the action…and probably only 1 out of 100 potential litigants has or is willing to spend HIS own cash on same.
I know the plaintiff suing me did NOT have any money to waste on a lawyer, and the lawyer wasn’t trusting that the LLC he was suing did either. Therefore he let the action be dismissed.
YOUR money? Or MINE? Sure, why not? But his own? Forget it!!
Re: Is an LLC worthless? - Posted by eric
Posted by eric on February 07, 2005 at 10:11:04:
This is the continuing debate among legal professionals and others. The answer is, it depends. It depends on how many properties you own (or plan to own). It depends on the value/equity of those properties. It depends on the type of lawsuit that occurs. It depends on your investment goals. Simply put, there is no bright line test to determine what an investor should do to protect themselves.
In general, piercing the veil is not that easy if the entity is set up and run properly. It is a heavy burden to meet. Absent clear fraud, clear non-obserbvance of formalities or individual tort liability, it’s tough to get through. LLC’s generally don’t require a lot of formalities. So as long as you have separate bank accounts, separate insurance and always do the business through those entities, it would be tough to pierce.
Boat accidents and people getting hurt are insurable events. As long as you have sufficient insurance, you should be protected from those types of suits. Excess policies and unmbrella policies can be had for reasonable amounts. Sometimes, the costs of setting up and running an LLC can buy you several million dollars of excess coverage. However, insurance also has its pitfalls. They are called exclusions. You need to understand what is covered and what is not before making the “LLC or insurance” decision.
You need to talk to an attorney who specializes in this area of the law for your state.
Re: Is an LLC worthless? - Posted by wwjmaj
Posted by wwjmaj on February 05, 2005 at 14:25:22:
It sounds to me as if you have a generalist or real property practitioner and not an attorney specializing in rentals and/or asset protection. I have never been to a reputable seminar that advocated an LLC instead of proper maintenance and adequate insurance, and I too poo pooed the idea of an LLC …until a client lost two properties to settle a suit.
Before you drop the idea of an LLC PLEASE talk to an attonrey specializing in real property asset protection in your state. In our state we usually have husband and wife owning the property but long term leasing it to your LLC (wherever formed) for management including rental, maintenance and debt service. Then ONLY one spouse handles the LLC and does all rental contacts. Make sure all of your tenants make the checks out to the LLC and make sure all of your adds and documents use the LLC.
You don’t want to ever be in a position of making “history for decades to come.” you want to be judgement proof and assets separate from libilities for decades to come!
P.S.
Alright I admit I am an attorney (ONLY IN MI) and I too used to give advice similar to your attorney’s. "We are a rural county, with conservative juries. They have never awarded $100,000)…of course that was 1983 and now we have several $1,000,000 + awards or settlements per year and I see several Defendants each year giving up assets to settle suits or pay judgements even though our county is still Very rural and Very conservative. These are Defendants with insurance not the jokers without. Bottomline Get a qualified second opinion where you live.
Re: Is an LLC worthless? - Posted by Bill H
Posted by Bill H on February 05, 2005 at 11:16:42:
The attorney is correct, especially if the LLC is a single member LLC.
The LLC provides a certain amount of protection and anonominity but nothing will protect you completely…look at the tobacco law suits.
Good luck,
Bill H