Limited liability companies (LLCs) are common ways for real estate owners and developers to hold title to property. Their popularity is due, in part, to the fact that LLCs limit members’ personal liability. In other words, only an LLC member’s equity investment is usually at risk, not his or her personal assets. However, this does not mean personal liability never exists for the LLC’s debts and liabilities. Below are some of the exceptions that may risk an owner’s or developer’s personal finances.
Making personal guarantees and contracts
If an LLC member personally guarantees the company’s debts or obligations, they will be held liable for the LLC’s default on that debt. This is more common they one might think. Many LLC members enter into contracts or financing agreements on the LLC’s behalf before the LLC legally comes into existence, if the other party insists on some guarantee.
Minimizing risk
- Always act in the LLC’s name. When you sign contracts or financial agreements, do so solely as an agent of the LLC, making sure to identify the LLC as the principal in the document;
- Make sure that the LLC’s other agents and employees act as representatives of the entity, not of you personally;
- For extra protection, members might consider adding a personal umbrella policy to the LLC’s traditional business insurance coverage; and
- Carefully review all loan documents to make sure you completely understand the consequences of all potential covenant violations, as certain loan defaults may also create personal liability.
Piercing the corporate veil
On rare occasions, a court will pierce the corporate vail to impose liability for an LLC’s debt and obligations on its members.
This typically occurs when closely held and small businesses fail to observe corporate formalities such as:
- Holding regular board meetings;
- Keeping board minutes;
- Adopting bylaws; and
- Ensuring company finances are separate from those of members.
It could also happen if the LLC engages in reckless conduct, fraud or was inadequately capitalized from the beginning.
In all of these circumstances, a court might conclude that the LLC is merely a sham to shield its members from liability. Once a court makes that decision, LLC members’ personal assets can be used to satisfy LLC liabilities.
Paying for environmental clean-up
Environmental liability is a common concern when purchasing property, and using an LLC to make a sale or purchase does not eliminate that concern. The Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) imposes strict joint liabilities for clean-up costs on past and present owners and operators of facilities where hazardous materials have been released.
When it comes to holding LLC members personally liable, no showing of negligence or intent is required under CERCLA. Any LLC member who had the authority to control the operations or decisions involving the disposal of hazardous substances could be held liable for clean-up.
Finding negligence and wrongful acts
Issue: An LLC will not protect a member from liability for his or her own negligent or otherwise wrongful acts that cause injury to another, such as assault or fraud. This could include negligent hiring or supervision of employees if an employee causes some type of injury and the member hired the employee in his or her own name, rather than in the LLC’s name.
Also, if an LLC member commits a wrongful act that causes injury while acting as an agent or employee of the LLC, it is not just the member’s personal assets that could be targeted by the injury victim. The victim could also go after the LLC’s assets under a theory of vicarious liability (also known as respondeat superior liability) for its agent’s acts.
Protect your personal assets
Do you think an LLC might be the best business structure for your next real estate venture? While an LLC offers many benefits, do not overlook possible personal liability risks. LLC rules vary by state. So, be sure to research your jurisdiction. Consult with your attorney and financial expert to create strategies to protect both your LLC and your personal assets.
For more information, contact Tanya Gierut, at [email protected], or call her at 312.670.7444. Visit ORBA.com to learn more about our Real Estate Group.
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I had 3 different LLC, I had 5% ownership at each LLC
5% ownership of LLC can protect from nursing home or any law suit?
Thank you for your comment. We are certified public accountants, and therefore, cannot provide you with legal advice. We strongly recommend that you contact your lawyer for confirmation of your assumption.
I am purchasing real estate in a partnership and am seeking information on whether or not an LLC is advisable from a legal protection standpoint and a tax benefit for both partners.
1) I have been made to understand that real estate cannot be financed in the name of an LLC initially and if a property is deeded to the LLC after the deal is made, the individual who deeds the property to the LLC will have to personally guarantee the mortgage despite it being in the name of the LLC. Is there any way to secure your personal assets and ensure that the LLC alone is liable for the real estate property?
2) What are the tax advantages available when investing in real estate? Are these affected by holding your properties in an LLC?
1. Contact us to discuss the tax advantages of investing in real estate.
2. An LLC the way the property is held – not taxed. An LLC can be taxed on an individual’s personal tax return (Single member LLC) or if multiple partners in an LLC, a partnership return is required. A partnership tax return is a flow-through entity, therefore all of the partner’s allocable share of income, deductions and credits are reported on that individual’s personal tax return. There may be a separate state filing requirement depending on where the real estate is located. There are many tax advantages of investing in real estate but the tax rules are complex and vary for each individual’s circumstances.
Can a financial backer who fronts factored invoices sue the business owner, after the business is sold, and request money made from the sale of his personal home?
Thank you for your comment. We are certified public accountants, and therefore, cannot provide you with legal advice. We strongly recommend that you contact your lawyer for confirmation of your assumption.
I am a home day care provider . Does your home get protected if you run a business out of your home as an LLC ?
Since the home is involved in the business ?
Thank you for your comment. We are certified public accountants, and therefore, cannot provide you with legal advice. We strongly recommend that you contact your lawyer for confirmation of your assumption.
IS AN LLC IN LOUISIANA STILL VALID IF YOU HAVEN’T FILED ARTICLES OF ORGANIZATION FOR 3 STRAIGHT YEARS ?
Thank you for your comment. We are certified public accountants, and therefore, cannot provide you with legal advice. We strongly recommend that you contact your lawyer for confirmation of your assumption.
If the members of an LLC use their home address not only as the place where the LLC is registered,, but as the main business address, can a creditor who successfully sues the LLC attach a lien on the home?
Thank you for your comment. We are certified public accountants, and therefore, cannot provide you with legal advice. We strongly recommend that you contact your lawyer for confirmation of your assumption.
If an LLC uses his home as his business address and works out of his home, can a property lien be placed on his residence for a court judgement against his LLC or personally as the owner of the business?
Thank you for your comment. We are certified public accountants, and therefore, cannot provide you with legal advice. We strongly recommend that you contact your lawyer for confirmation of your assumption.