Rental, LLC, and legal protection

Many people think that they need an LLC to manage the rental, and that the LLC can provide some protection. I would like to get clarification for a few things, but first let me provide a concrete example to talk about.

John has rental homes A and B under his personal name, and they set up an LLC also under his own name, he did not make entity selection (disregarded entity). The LLC collects rents and pay expenses. Now my questions:

- A tenant fell down on a broken stairs and sued John, can the LLC provide any protection?
- John need to file rental on his personal Schedule E, and do not need to file for LLC because LLC and himself are one?

Now suppose they re-titled the homes A and B under the LLC, and keep accounting separately from his personal accounts, now my questions:

- A tenant fell down on a broken stairs and sued John, the tenant can claim damages against both home A and B, but not John's personal home?
- Does John need to elect to file a Corp return in order to have the legal protection mentioned above? If the LLC is a disregarded entity, then John needs to file the LLC income on personal Schedule E? Does filing Schedule E affect the legal protection?

I have heard that when someone sets up an LLC for each of his 10 rental homes, presumably recommended by lawyers. Have you heard of this, and how do you think of it? Thanks.

An LLC generally provides the same asset protection for its member(s) as a corporation does for its stockholder(s). It's a matter of state law. Federal tax law is irrelevant.

I agree with Steve! Why didn't you go further, YOU'RE the attorney.

So you'll correct my errors......to have any protection for John, those properties need to be in the name of the LLC. And yes, in most states, same legal protection as a corp. He need NOT to elect anything, just get them titled correctly.

Now, as to whether that can be pierced....did he work on the stairs? Did he know they were in disrepair? Did he spray WD-40 on them? lol.....so LIMITED liability is probably the key. It all depends.

But he has none in my non-legal opinion when they're under his personal name.

An LLC generally provides the same asset protection for its member(s) as a corporation does for its stockholder(s). It's a matter of state law. Federal tax law is irrelevant.

gatortaxguy, thanks for the clarification. Would be filing on Schedule E considered as not separating business from personal, and filing Corp return considered as more separated? Or it does not matter?

No, as Steve said, tax status has NOTHING to do with legal status. And you never ever no not ever want to put real estate into a corp.

But he has none in my non-legal opinion when they're under his personal name.

If John hires a third party managing company, then I would think the company may share some of the responsibilities, even the company does not own the rental. For example, did the company inspect the rental periodically? It all depends on the contract. Now the managing company is his own LLC, how would this work?

If you want the legal benefits of the LLC the property should be owned by the LLC, not the individual.

My layman's understanding is that individuals are liable for torts they commit regardless of whether they're acting as an agent for a legal entity. If John is managing the LLC and is negligent in the performance of his duties....perhaps because the tenant informed John that the stairs were in disrepair and he never took action to remedy the problem...both John and the LLC will be named as co-defendants in the suit.

John shouldn’t rely on LLC status alone for protection. IMO, a good comprehensive insurance policy does far more.

No, as Steve said, tax status has NOTHING to do with legal status. And you never ever no not ever want to put real estate into a corp.

I also heard of that, but can you clarify, some bullet points please?

My layman's understanding is that individuals are liable for torts they commit regardless of whether they're acting as an agent for a legal entity.

Suppose the tenant called John for the disrepair, John called ABC repair company, the ABC repair company sends its employee Robert to do the repair, but Robert did a sloppy job and caused an accident later. Usually the ABC company pays for the loss, and dismiss Robert. Robert could be personally liable in theory?

Way too many to remember....but in short, when the day comes, and it always does, when you want the real estate out of the corp, you create tax. (Exception is if it's an S corp and you just sell it outright since everything passes thru.) But quite often a biz owner will run out of a building....when it's time, he can sell the biz and keep the building. More buyers, keeps rental income, etc. If he does that with a building that's been inside the corp, it's a deemed sale at FMV and pay tax. Now.

There's the biggie.

And all the legal questions should be directed to an atty who's willing to be there when he gets it wrong!

We're only pretend atty's, most of us.

Suppose the tenant called John for the disrepair, John called ABC repair company, the ABC repair company sends its employee Robert to do the repair, but Robert did a sloppy job and caused an accident later. Usually the ABC company pays for the loss, and dismiss Robert. Robert could be personally liable in theory?

I don't know. Why do we care about what happens to Robert? If the client, John, timely hired a reputable, licensed and bonded repair company to address the issue, he's not negligent.

I don't know. Why do we care about what happens to Robert? If the client, John, timely hired a reputable, licensed and bonded repair company to address the issue, he's not negligent.

True, we do not need to care about Robert, but I am wondering how would this compares with John if John did the repair himself as an employee (owner, member) of his own LLC which manages the rental.

You can be sure that a tenant or guest will eventually be injured and seek compensation. An LLC without sufficient assets or liability insurance will not likely protect the owner from personal liability for personal injuries under the alter ego legal doctrine. Title held by an LLC is not failsafe protection. Insurance is always prudent and also provides a defense to lawsuits.

You can be sure that a tenant or guest will eventually be injured and seek compensation. An LLC without sufficient assets or liability insurance will not likely protect the owner from personal liability for personal injuries under the alter ego legal doctrine. Title held by an LLC is not failsafe protection. Insurance is always prudent and also provides a defense to lawsuits.

keiser, Thank you for your post! Personally I like what I said, do we have actual legal cases that prove or disprove LLC protection? For example, a tenant sued an LLC which holds a rental property for a million dollars, the LLC lost the case, but the LLC had only half million equity in the rental property, so the LLC sold the property and settled the case. Such a case exists? I read many articles on LLC protection for the rental property, but I could not find actual cases.

You're not seeing those cases because it's not an issue, it's well understood. Members are not liable for judgments against LLCs unless the LLC shield is penetrated. (That's usually takes fraud or disregard of the separate entity status.) Members can get sued for their own torts while acting on behalf of the LLC (e.g., breach of fiduciary duty owed to another member.) And members can get sued by LLC creditors under the fraudulent transfer statutes. And that's about it.

Inadequate capitalization is frequently a ground for litigation attempting to pierce the "corporate veil."
Insurance both pays for the defense and provides a substitute for capital.

If a landlord buys a 10 unit apartment with no money down, and no assets, absent insurance he will be personally sued and probably personally liable if a visitor falls and suffers a catastrophic injury.

"The rule that inadequate capitalization may be considered as a factor in determining whether the corporate entity should be disregarded was followed in Shea v. Leonis, 14 Cal.2d 666 [96 P.2d 332], where a lessee attempted to escape liability for rent due under a lease by assigning his interest in the lease to a corporation which was without other assets. The court held that the owners of the corporate stock were liable for the rental payments, pointing out that it is proper to disregard corporate existence "where, as in the instant case, the device adopted is ... an attempt to avoid liability for benefits enjoyed by means of taking the obligation in the name of a specially organized corporation which has no assets." In Carlesimo v. Schwebel, 87 Cal.App.2d 482 [197 P.2d 167], it was recognized that "the proper rule is that inadequate financing, where such appears, is a factor, and an important factor, in determining whether to remove the insulation to stockholders normally created by the corporate method of operation." (See also Mosher v. Salt River Valley Water Users' Assn., 39 Ariz. 567 [8 P.2d 1077]; Ballantine, Corporations: "Disregarding the Corporate Entity" as a Regulatory Process (1943) 31 Cal.L.Rev. 426, 427; Fuller, The Incorporated Individual: A Study of the One-Man Company (1938) 51 Harv.L.Rev. 1373, 1381-1383..."Automotriz etc. De California v. Resnick (1957) 47 Cal. 2d 792, 796.

It's more difficult to pierce in Florida. Piercing the corporate veil requires the plaintiff prove: (1) a lack of separateness between the corporation and its shareholder(s); (2) improper conduct in the use of the corporation by the shareholder(s); and (3) that the improper conduct was the proximate cause of the alleged loss. See Solomon v. Betras Plastics, Inc., 550 So. 2d 1182, 1184-85 (Fla. 5th DCA 1989).

Piercing the corporate veil is not easy in CA either.
But catastrophic injuries engender serious litigation putting the owner's personal assets at risk.
Insurance pays for a defense which might otherwise be an expensive burden.
Insurance also removes "inadequate capitalization" from the equation.
Holding property in an LLC may be a good idea in the abstract but it is not always a complete shield to personal liability.
Buying adequate insurance is a often practical necessity.