LLCs for Real Estate Investments

 Posted on October 24, 2022 in Real Estate

Naperville and Yorkville Real Estate Lawyer for Landlords

What is a Limited Liability Company?

Limited Liability Companies (hereinafter referred to as “LLCs”) are the preferred choice of business entity for real estate investors (except for real estate owners involving in flipping real estate). 

LLCs are increasingly popular because of their flexibility, liability protection, and flow-through tax treatment. In this article, we will discuss the pros and cons of an LLC for real estate investors and other considerations that must be considered by real estate owners and investors.

Often, real estate investors feel that liability insurance is a safe liability decision other than investing in an LLC. Assets owned in your personal name have significant liability risks and liability insurance limits that risks (to some extent), but liability insurance has gaps. 

In Illinois where I primarily practice law, I have seen the following issues involving liability insurance. The first issue is an insurance company finds reasons to avoid paying out claims even valid claims at time. If you review an insurance contract, the exceptions (of coverage) page is extensive and specific. 

The second issue is real estate investors are often underinsured. Underinsured means that the insurance coverage is insufficient or a particular type of claim is uncovered. The uncovered and under insured coverage presents a significant problem for real estate investors because excluded coverage may not cover your exposure. 

On the contrary, incorporating an LLC and having proper liability insurance (at least a $1 million in coverage) is a better solution. Depending on your net worth (or your level of assets), a $1 million in coverage may make you under insured. 

The benefit of incorporating an LLC is the liability protection provided by an LLC. An LLC will provide you limited liability protection if corporation formalities are established and followed. Having a written LLC Operating Agreement and having yearly LLC meetings and minutes should be followed. 

You also should make sure you are capitalized to minimize any pierce the LLC veil arguments. The benefit of an LLC is personal liability protection. Thus, if your liability insurance does not cover your claim and/or your liability insurance is insufficient, your personal assets are theoretically protected from personal liability. Simply put, the creditor cannot attach your personal assets to resolve your real estate litigation matter or claim. Real estate owners in the Naperville area such as Plainfield, Joliet, Yorkville, Oswego, Batavia, and Romeoville should be using LLCs and proper liability insurance.

Personal liability protection is a huge issue because no business owner or real estate owner wants their personal assets exposed in case of a liability concern. There are a variety of liability concerns such as contract disputes, personal injury issues, partnership and customer disputes, and many other issues. 

Often, in Illinois, a creditor or an attorney for a creditor will name the members of the LLC as individual Defendants in a lawsuit. Your first thought is I thought LLCs provided personal liability protection. Yes, LLCs do provide personal liability protection but predator personal injury and commercial litigation attorneys (hereinafter referred to as “Plaintiff Lawyers”) make their living by arguing the exception. 

In many cases, real estate owners lack the capital to fight off Plaintiff Lawyers and they lose their case because they could not afford a two (2) year litigation battle. The real estate owner hires an attorney and after one (1) year of service, your litigation attorney withdraws for non-payment of their attorney fees (from you). 

Now, as the real estate owner, you are faced with representing yourself as a self-represented litigant or worse yet, you cannot represent an LLC because you are not an attorney. The Plaintiff Lawyer knows that they may not be able to prevail with their theory naming you as an individual Defendant but understands that their best leverage in negotiations is to name you personally as a Defendant. 

The Plaintiff Lawyer loves the Consumer Fraud and Deceptive Business Practices Act (hereinafter referred to as “Business Fraud Act”) because it is their tool to nail an individual real estate owner. 815 ILCS 505/Consumer Fraud and Deceptive Business Practices Act. 

More importantly, the Business Fraud Act gives a Plaintiff’s Lawyer reasonable attorney fees and punitive damages if they win. In summary, a $1 million damage case may turn into a $3 million damage case. As the real estate owner (and family of the real estate owner), this is a bad bad scenario.

In conclusion, Landlord Evictions, LLC concentrates its’ practice representing the interests of property owners and real estate investors. Our law firm helps proprietors and property owners with their eviction needs, asset protection, and estate planning legal needs for property owners. Contact us today via online form or at 630-780-1034.