For landlords, the LLC is often your best bet for asset protection. However, the problem is that without a lot of fine tuning and really understanding what an LLC is doing, even an LLC won't really give you much cover. To get the protection of an LLC, you've got to go a lot further than just filing papers with the state and calling yourself an LLC. It's unfortunate, but that's probably exactly what many landlords have done. In this special Update, I've asked my friend and attorney Lee Phillips to share an experience he had with one of his clients regarding LLCs.
My name is Lee Phillips. I have worked with Mr. Landlord for over 25 years. My background includes serving as an attorney and as a United States Supreme Court Counselor and Federal Tax Court Attorney, but asset protection and making more money are my passions.
A large ad agency in Los Angeles contacted me awhile back. The owners operated for years as a partnership. They knew they were personally liable—all their personal assets were at risk for everything that happened in the agency. They finally woke up and realized that they had a good business and they needed to get some protection.
It's the smart, successful people that try to protect themselves. When you put asset protection measures in place, you've got to remember that you're not only protecting yourself, you are protecting your family and their lifestyle. By the way, it doesn't matter if you are in landlording, real estate investing, or have a business or corporation. I will tell you that you need to change it to an LLC. An LLC is literally going to give you twice as much asset protection as you get from a corporation.
Anyway, the ad agency partners had a popular legal internet site form an LLC for them. Most internet sites charge $300-500 for filing the papers with the state and then an extra $500 or so if you want an operating agreement. The problem is that internet sites are always pitching to the lowest common denominator. It's one size fits all for them.
This ad agency got the internet LLC, and a year later they got sued. When they got into court, the people suing them argued that the court should set aside the LLC and let them sue the owners and get their personal assets in addition to the company assets.
It took 15 minutes of arguing for the court to agree to set aside the LLC and all its protection. There is about a 90% chance the owners would have been in exactly the same position if a lawyer had done the LLC for them. The internet sites and even 90% of lawyers only get you halfway there.
When the ad agency owners talked to me, the only request they had was "Let's do it right this time."
I actually made them listen to audio instructions I prepared to help people make their LLCs work for them. Funny thing: if you make your LLC work for you, you'll get more money and be protected when there's a disaster. Yet, everybody that gets an LLC, it's just a piece of paper in a file cabinet or binder.
It doesn't have to be that way. There is a LLC course I developed that walks you through how to get the asset protection an LLC can give you. Plus, it shows you how to make more money in your LLC. The piece of paper is the first step, but there's a lot more to it. It's not hard, especially when I explain it in plain English. You can't afford to pay the lawyer to explain it to you, and the internet sites don't explain it either. So, 90% of the time it turns out to be a mess.
90% of the people who get an LLC don't get protected and they don't make any more money. They could, but they don't. People will assure me that their lawyer did a great job or they'll tell me that they've studied everything on the internet, but the proof is in the pudding. They aren't protected when they need it and they don't make more money.
I redid the paperwork for the LA ad agency, and once those guys listened to the tutorial, they were home free. It's been smooth sailing for them ever since. I'll assume you're either planning on getting an LLC or you have an LLC. I'll assume you have filed your LLC with the state, but you may or may not have an operating agreement. If you do have an operating agreement, you do not know how to use it to make more money and how to get more asset protection.
I have an audio tutorial for you that pulls apart a sample LLC operating agreement and teaches you how to use it. You can use the operating agreement if you don't already have one, or use it to supplement what you already have. The LLC Operating Agreement plus audio tutorial is available to MrLandlord Update readers for only $19.97 (regular price $97) To learn more about it or to get a copy of the LLC agreement and audio tutorial, click now.