Asset Protection: Multiple LLCs July 1, 2008
Posted by Jeff Nabers in Self Directed IRA/401k, real estate.Tags: self directed, ira, 401k, real estate, invest, investing, llc, assets, limited liability company, liability, limited liability corporation, asset protection, protect, safeguard, corporation, estate planning, apartments
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LLC stands for limited liability company, and that is the primary purpose for forming such a legal entity. When you enter into a business transaction as an individual (aka sole proprietor), if somebody decides to sue you, all of your personal assets can be subjected to satisfying the law suit. The idea behind an LLC or Corporation is that people are doing business with that entity (the LLC, for example). When a true separation is maintained between the LLC and its members/owners, the LLC can only lose its assets… but not the unrelated assets of its owners.
The cross-liability of one LLC with multiple assets or businesses
Jeremy forms JAH LLC to buy and hold apartment buildings. He buys Apartment Building A as well as Apartment Building B & Apartment Building C.
An accident occurs and somebody gets hurt in the common area of Apartment Building A. This person sues the owner of the buildings, JAH LLC.
Personal assets - Jeremy’s personal assets are protected from exposure to this law suit (except for what he contributed into JAH LLC).
Apartment Building A - All of the assets of JAH LLC can be exposed to satisfying the law suit. This includes bank accounts relating to Apartment Building A and even the real estate itself.
Apartment Building B - All of the assets of JAH LLC can be exposed to satisfying the law suit. This includes bank accounts relating to Apartment Building B and even the real estate itself.
Apartment Building C - All of the assets of JAH LLC can be exposed to satisfying the law suit. This includes bank accounts relating to Apartment Building C and even the real estate itself.
The additional protection of multiple LLCs
Jeremy forms JBX LLC to buy and hold Apartment Building X. He forms JBY LLC to buy and hold Apartment Building Y. He also forms JBZ LLC to buy and hold Apartment Building Z.
An accident occurs and somebody gets hurt in the common area of Apartment Building X. This person sues the owner of the building, JBX LLC.
Personal assets - Jeremy’s personal assets are protected from exposure to this law suit (except for what he contributed into JBX LLC).
Apartment Building X - All of the assets of JBX LLC can be exposed to satisfying the law suit. This includes bank accounts relating to Apartment Building X and even the real estate itself.
Apartment Building Y - The assets of JBY LLC , including Apartment Building Y real estate, are protected from exposure to this law suit because JBY LLC was completely unrelated to the incident with which the law suit is concerned.
Apartment Building Z - The assets of JBZ LLC , including Apartment Building Z real estate, are protected from exposure to this law suit because JBZ LLC was completely unrelated to the incident with which the law suit is concerned.
The liability protection of any LLC is only in effect if the LLC is properly maintained as its own separate entity. The asset protection of multiple LLCs for multiple assets is more useful in some situations than others. Stay tuned:
More posts to come soon…
Liability of Real Estate Ownership
Entity Maintenance
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[...] Original post by IReference - The Reference Site [...]
Jeff,
I see this structure frequently in investment memorandums. One question I had though- is it possible to subdivide the asset (an apt. building for example) into even smaller pieces (maybe by floor) to limit liability even more?
Another question- how difficult is it to set up and “properly maintain” the LLC?
Thanks for your time,
Max
Re: splitting asset into smaller pieces - I’ve never seen this. It all comes down to how the real estate is divided and titled. I suppose you could subdivide common area of each floor into its own title and own it through a unique entity. I’ve never seen it done, and I think that might be more of a headache than it’s worth.
Generally that kind of intense asset protection is more called for when dealing with a “hot asset” (one that is seen to have significant liability). Normally, real estate isn’t much of a hot asset. For instance if you were owning bungee jumping towers, you might want to make each site its own company because that is obviously a hot asset.
Re: LLC maintenance - great question. Keep an eye out over the next 10 days for a post regarding this.
Hi Jeff,
Looking at your last example, what if jbx, llc, y and z were owned by JBA,LLC and someone got hurt in building x, how would JBA, LLC be affected?
Thank you,
Manyale
Manyale,
Please clarify whether the “y” and “z” in your question represent apartment buildings or LLCs.
Jeff