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Asset Protection: Multiple LLCs

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

Comments

  1. 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

  2. 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.

  3. 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

  4. Manyale,

    Please clarify whether the “y” and “z” in your question represent apartment buildings or LLCs.

    Jeff

  5. I am interested in putting some income producing assets in either my 401K or IRA can this be accomplished? How? Which is better for this purpose, 401K, IRA, Roth IRA?

  6. An IRA or 401k can purchase income producing assets. These can’t be assets that you already personally own. Generally a Solo 401k is much better than an IRA for self directed investing for many reasons, but it requires self employment activity for eligibility. To learn more, visit and subscribe to http://www.solo401k.com.

  7. Mike Walsh says:

    I have recently purchased an investment house using my HELOC and later used a solo 401(k) loan to pay off the HELOC. My plan is to refinance the home in 6 months and repay the 401(k) loan.

    I would like to protect my personal assets by using an LLC as mentioned above.

    1.Can I establish the LLC, deed the property to the LLC, and loan the purchase money to the LLC from the 401(k) loan?

    2. What issues (if any) do you forsee with this?

  8. Mike,

    If I understand you correctly you personally own a property, and you have an outstanding Solo 401k participant loan. You want to create an LLC and transfer the property to it.

    That said, I don’t understand your question. Please clarify. Thanks.

  9. William says:

    Two questions:

    Can anyone direct me to definitive law regarding the cross-liability protection (or lack thereof) of Real Property Investment A from Real Property Investment B inside of an IRA?

    Who is knowledgeable of both the case law and the formation of series LLC’s in which a master LLC is created, with individual real properties being placed in the sub-series (or “cells”) LLC’s beneath the master? I’ve read a little about these (in theory), but have found little full blown explanation, little case law discussed, and almost no attorney who knows what I’m talking about or can set one up for me.

    Thanks.

  10. William,

    Series LLCs, so far, are falling short of the confidence that multiple LLCs foster. Additionally, the most tax-hungry states (like CA) have started requiring each series/cell to pay it’s own set of taxes, franchises fees, and filing fees when doing business in that state.

    As far as wanting legal analysis of cross liability protection from one entity to another… mounds of statutory law and case law exist going back hundreds of years. That’s certainly outside the scope of my blog, and you should talk to an attorney.

    Jeff

  11. Jeff,

    I apologize, I don’t know much about LLCs and came across your blog post while researching possible consequences.

    My brother-in-law has a very successful LLC that owes a lot of back taxes (we’re talking 4-5 years here). He has spent like a drunken sailor and put off the IRS every year thinking he’ll either start saving (long shot), come up with the funds somehow, or brainstorm a way out of it. Lo and behold, he chose Door C.

    His grand idea is to form a new LLC, saddle the old LLC with the new LLC’s costs so if it goes under, the startup funding for LLC-B can get discharged with all of LLC-A. Oh, and, his oldest son just turned 18 so he’s going to “transfer” LLC-B into his son’s name for, what he claims is, an additional layer of asset protection.

    Nearly everyone who knows of this plan can clearly see how it’s borderline fraudulent, and at the very least, prohibited. However, he’s like an insane despot, convinced he’ll easily get away with it since the IRS has bigger and better fish to fry.

    Please, please correct me if my hypothesis is wrong: like personal bankruptcy, if you attempt to “transfer” all your assets to a family member in hopes that said assets can be protected from proceedings, agencies can simply reverse the questionable sale or transfer. Otherwise, we’d have a lot more people gifting assets away before filing bankruptcy. Doesn’t the same hold true in this case, even though it’s technically two LLCs? I would really like to avoid this and am even willing to pay for a tax attorney to go advise him of this ill-conceived scheme.

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